CREDIT APPRESIAL
AB1786
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Sep 14, 2017
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About This Presentation
THIS IS A COMPLETE PROJECT ON CREDIT APPRESIAL
Slide Content
0
INDEX
CHAPTER
NO.
TOPIC PAGE
NO.
1. INTRODUCTION TO BANKING
SECTOR
1-6
2. INTRODUCTION OF CREDIT
APPRASIAL PROCESS
7-13
3. IMPORTANCE OF CREDIT
APPRASIAL PROCESS
14-19
4. BRIEF STUDY ON CREDIT
APPRASIAL PROCESS
20-39
5. CREDIT RISK ASSESSMENT 40-43
6. NORMS FOR CREDIT APPRASIAL 44-48
7. CASE STUDY 49-67
8. LITERATURE REVIEW 68-74
9. CONCLUSION 75-76
10. BIBLOGRAPHY 77-78
INDEX
CHAPTER
NO.
TOPIC PAGE
NO.
1. INTRODUCTION TO BANKING
SECTOR
1-6
2. INTRODUCTION OF CREDIT
APPRASIAL PROCESS
7-13
3. IMPORTANCE OF CREDIT
APPRASIAL PROCESS
14-19
4. BRIEF STUDY ON CREDIT
APPRASIAL PROCESS
20-39
5. CREDIT RISK ASSESSMENT 40-43
6. NORMS FOR CREDIT APPRASIAL 44-48
7. CASE STUDY 49-67
8. LITERATURE REVIEW 68-74
9. CONCLUSION 75-76
10. BIBLOGRAPHY 77-78
1
CHAPTER:-1
INTRODUCTION TO
BANKING SECTOR
CHAPTER:-1
INTRODUCTION TO
BANKING SECTOR
2
INTRODUCTION
HISTORY OF BANKING INDUSTRY:
The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs).
As at end-March 2002, there were 296 Commercial banks operating in India.
This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and
196 Regional Rural Banks. Also, there were 67 scheduled co-operative
banks consisting of 51 scheduled urban co-operative banks and 16 scheduled
state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14%
as against 18% registered in the previous year. And on advances, the growth
was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of
20% ICICI and its two subsidiaries merged with ICICI Bank, leading
creating the second largest bank in India with a balance sheet size of Rs.
1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing
with the concept of ‘past due’ for recognition of NPAs, lowering of ceiling
on exposure to a single borrower and group exposure etc., are among the
measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb losses and the ratio has
INTRODUCTION
HISTORY OF BANKING INDUSTRY:
The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs).
As at end-March 2002, there were 296 Commercial banks operating in India.
This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and
196 Regional Rural Banks. Also, there were 67 scheduled co-operative
banks consisting of 51 scheduled urban co-operative banks and 16 scheduled
state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14%
as against 18% registered in the previous year. And on advances, the growth
was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of
20% ICICI and its two subsidiaries merged with ICICI Bank, leading
creating the second largest bank in India with a balance sheet size of Rs.
1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing
with the concept of ‘past due’ for recognition of NPAs, lowering of ceiling
on exposure to a single borrower and group exposure etc., are among the
measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb losses and the ratio has
3
subsequently been raised from 8% to 9%. It is proposed to hike the CAR to
12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home loans
alone account for nearly two-third of the total retail portfolio of the bank.
According to one estimate, the retail segment is expected to grow at 30-40%
in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are
the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of
information on borrowers / potential borrowers by banks and Financial
Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up
in August 2000. The Bureau provides a framework for collecting, processing
and sharing credit information on borrowers of credit institutions. SBI and
HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and
National bank for Agricultural and Rural Development to the private
players. Also, the Government has sought to lower its holding in PSBs to a
minimum of 33% of total capital by allowing them to raise capital from the
market.
Banks are free to acquire shares, convertible debentures of corporate and
units of equity-oriented mutual funds, subject to a ceiling of 5% of the total
outstanding advances (including commercial paper) as on March 31 of the
previous year.
The finance ministry spelt out structure of the government-sponsored ARC
called the Asset Reconstruction Company (India) Limited (ARCIL), this
subsequently been raised from 8% to 9%. It is proposed to hike the CAR to
12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home loans
alone account for nearly two-third of the total retail portfolio of the bank.
According to one estimate, the retail segment is expected to grow at 30-40%
in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are
the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of
information on borrowers / potential borrowers by banks and Financial
Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up
in August 2000. The Bureau provides a framework for collecting, processing
and sharing credit information on borrowers of credit institutions. SBI and
HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and
National bank for Agricultural and Rural Development to the private
players. Also, the Government has sought to lower its holding in PSBs to a
minimum of 33% of total capital by allowing them to raise capital from the
market.
Banks are free to acquire shares, convertible debentures of corporate and
units of equity-oriented mutual funds, subject to a ceiling of 5% of the total
outstanding advances (including commercial paper) as on March 31 of the
previous year.
The finance ministry spelt out structure of the government-sponsored ARC
called the Asset Reconstruction Company (India) Limited (ARCIL), this
4
pilot project of the ministry would pave way for smoother functioning of the
credit market in the country. The government will hold 49% stake and
private players will hold the rest 51%- the majority being held by ICICI
Bank (24.5%).
pilot project of the ministry would pave way for smoother functioning of the
credit market in the country. The government will hold 49% stake and
private players will hold the rest 51%- the majority being held by ICICI
Bank (24.5%).
5
REFORMS IN THE BANKING SECTOR:
The first phase of financial reforms resulted in the nationalization of 14
major banks in 1969 and resulted in a shift from Class banking to Mass
banking. This in turn resulted in a significant growth in the geographical
coverage of banks. Every bank has to earmark a minimum percentage of
their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and
the banking sector was a critical source. The next wave of reforms saw the
nationalization of 6 more commercial banks in 1980. Since then the number
scheduled commercial banks increased four-fold and the number of banks
branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it
extremely difficult to complete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance
after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. These banks due to their late
start have access to state-of-the-art technology, which in turn helps them to
save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates
accounted for a 25% share in deposits and 28.1% share in credit. The 20
nationalized banks accounted for 53.5% of the deposits and 47.5% of credit
during the same period. The share of foreign banks ( numbering 42 ),
regional rural banks and other scheduled commercial banks accounted for
5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and
12.85% respectively in credit during the year 2000.
REFORMS IN THE BANKING SECTOR:
The first phase of financial reforms resulted in the nationalization of 14
major banks in 1969 and resulted in a shift from Class banking to Mass
banking. This in turn resulted in a significant growth in the geographical
coverage of banks. Every bank has to earmark a minimum percentage of
their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and
the banking sector was a critical source. The next wave of reforms saw the
nationalization of 6 more commercial banks in 1980. Since then the number
scheduled commercial banks increased four-fold and the number of banks
branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it
extremely difficult to complete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance
after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. These banks due to their late
start have access to state-of-the-art technology, which in turn helps them to
save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates
accounted for a 25% share in deposits and 28.1% share in credit. The 20
nationalized banks accounted for 53.5% of the deposits and 47.5% of credit
during the same period. The share of foreign banks ( numbering 42 ),
regional rural banks and other scheduled commercial banks accounted for
5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and
12.85% respectively in credit during the year 2000.
6
CLASSIFICATION OF BANKS:
The Indian banking industry, which is governed by the Banking Regulation
Act of India, 1949 can be broadly classified into two major categories, non-
scheduled banks and scheduled banks. Scheduled banks comprise
commercial banks and the co-operative banks. In terms of ownership,
commercial banks can be further grouped into nationalized banks, the State
Bank of India and its group banks, regional rural banks and private sector
banks (the old / new domestic and foreign). These banks have over 67,000
branches spread across the country. The Indian banking industry is a mix of
the public sector, private sector and foreign banks. The private sector banks
are again spilt into old banks and new banks.
CLASSIFICATION OF BANKS:
The Indian banking industry, which is governed by the Banking Regulation
Act of India, 1949 can be broadly classified into two major categories, non-
scheduled banks and scheduled banks. Scheduled banks comprise
commercial banks and the co-operative banks. In terms of ownership,
commercial banks can be further grouped into nationalized banks, the State
Bank of India and its group banks, regional rural banks and private sector
banks (the old / new domestic and foreign). These banks have over 67,000
branches spread across the country. The Indian banking industry is a mix of
the public sector, private sector and foreign banks. The private sector banks
are again spilt into old banks and new banks.
7
CHAPTER:-2
INTRODUCTION
OF CREDIT APPRASIAL
PROCESS
CHAPTER:-2
INTRODUCTION
OF CREDIT APPRASIAL
PROCESS
8
INTRODUCTION
Credit appraisal of a term loan denotes evaluating the proposal of the loan to
find out repayment capacity of the borrower. The primary objective is to
ensure the safety of the money of the bank and its customers. The process
involves an appraisal of market, management, technical, and financial.
Getting term loans from a financial institution is not so easy. The corporate
asking for the term loan has to go through several tests. The bank follows an
extensive process of credit appraisal before sanctioning any loan. It analyses
the loan proposal from all angles. The primary objective of credit appraisal
is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising term loans, a financial institution would focus on
evaluating the credit-worthiness of the company and future expected stream
of cash flow with the amount of risk attached to them. Credit worthiness is
assessed with parameters such as the willingness of promoters to pay the
money back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are a market, management, technical
and management.
It is the process by which the lender assesses the credit worthiness of the
borrower.
Procedures ofcredit appraisal: It revolves around character, collateral
capability and capacity. It takes into account various factors like income of
the applicants, number of dependents, monthly expenditure, repayment
capacity, employment history, number of years of service and other factors
which affect credit rating of the borrower.
INTRODUCTION
Credit appraisal of a term loan denotes evaluating the proposal of the loan to
find out repayment capacity of the borrower. The primary objective is to
ensure the safety of the money of the bank and its customers. The process
involves an appraisal of market, management, technical, and financial.
Getting term loans from a financial institution is not so easy. The corporate
asking for the term loan has to go through several tests. The bank follows an
extensive process of credit appraisal before sanctioning any loan. It analyses
the loan proposal from all angles. The primary objective of credit appraisal
is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising term loans, a financial institution would focus on
evaluating the credit-worthiness of the company and future expected stream
of cash flow with the amount of risk attached to them. Credit worthiness is
assessed with parameters such as the willingness of promoters to pay the
money back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are a market, management, technical
and management.
It is the process by which the lender assesses the credit worthiness of the
borrower.
Procedures ofcredit appraisal: It revolves around character, collateral
capability and capacity. It takes into account various factors like income of
the applicants, number of dependents, monthly expenditure, repayment
capacity, employment history, number of years of service and other factors
which affect credit rating of the borrower.
9
Confidence in the bank for someone, whether natural or moral, that gives
him a sum of money to be used for a specific purpose, during the agreed
period of time and under certain conditions to meet material return agreed
and guarantees enable the bank to recover the loan in case the client has
stopped payment
The assessment of the various risks that can impact on the repayment of loan
is credit appraisal. In short, you are determining "Will I get my money
back?". Depending on the purpose of loan and the quantum,the appraisal
process may be simple or elaborate. For small personal loans, credit scoring
based on income, life style and existing liabilities may suffice. But for
project financing, the process comprises technical , commercial, marketing,
financial , managerial appraisals as also implementation schedule and
ability.
The Credit Appraisal is a complete exercise which starts from the time a
potential borrower walks into the branch and concludes in credit delivery
and monitoring with the objective of certifying and maintaining the
quality of lending and managing credit risk. Credit appraisal is the
assessment of the viability of proposed long term investments in terms
of shareholder wealth and the formal analysis of all project costs and
benefits which is used to justify the project proposal. The bank has over the
years designed and adopted the Best Practices Code. This in effect
represents the bank's philosophy towards effective Corporate
Governance.
Confidence in the bank for someone, whether natural or moral, that gives
him a sum of money to be used for a specific purpose, during the agreed
period of time and under certain conditions to meet material return agreed
and guarantees enable the bank to recover the loan in case the client has
stopped payment
The assessment of the various risks that can impact on the repayment of loan
is credit appraisal. In short, you are determining "Will I get my money
back?". Depending on the purpose of loan and the quantum,the appraisal
process may be simple or elaborate. For small personal loans, credit scoring
based on income, life style and existing liabilities may suffice. But for
project financing, the process comprises technical , commercial, marketing,
financial , managerial appraisals as also implementation schedule and
ability.
The Credit Appraisal is a complete exercise which starts from the time a
potential borrower walks into the branch and concludes in credit delivery
and monitoring with the objective of certifying and maintaining the
quality of lending and managing credit risk. Credit appraisal is the
assessment of the viability of proposed long term investments in terms
of shareholder wealth and the formal analysis of all project costs and
benefits which is used to justify the project proposal. The bank has over the
years designed and adopted the Best Practices Code. This in effect
represents the bank's philosophy towards effective Corporate
Governance.
10
A good appraisal justifies spending money on a project. A proper
consideration of each of the key components of project appraisal is
essential.
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed its
funding pattern & further checks the primary & collateral security cover
available for recovery of such funds. Credit Appraisal is a process to
ascertain the risks associated with the extension of the credit facility. It is
generally carried by the financial institutions which are involved in
providing financial funding to its customers.
Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a
late charge if your payment is not on time.Loans let you borrow cash. Loans
can be for small or large amounts and for a few days or several years.
Money can be repaid in one lump sum or in several regular payments until
the amount you borrowed and the finance charges are paid in full. Loans can
be secured or unsecured.Installment credit may be described as buying on
time, financing through the store or the easy payment plan. The borrower
takes the goods home in exchange for a promise to pay later. Cars, major
appliances, and furniture are often purchased this way. You usually sign a
contract, make a down payment, and agree to pay the balance with a
specified number of equal payments called installments. The finance charges
are included in the payments. The item you purchase may be used as
security for the loan.Credit cards are issued by individual retail stores,
A good appraisal justifies spending money on a project. A proper
consideration of each of the key components of project appraisal is
essential.
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed its
funding pattern & further checks the primary & collateral security cover
available for recovery of such funds. Credit Appraisal is a process to
ascertain the risks associated with the extension of the credit facility. It is
generally carried by the financial institutions which are involved in
providing financial funding to its customers.
Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a
late charge if your payment is not on time.Loans let you borrow cash. Loans
can be for small or large amounts and for a few days or several years.
Money can be repaid in one lump sum or in several regular payments until
the amount you borrowed and the finance charges are paid in full. Loans can
be secured or unsecured.Installment credit may be described as buying on
time, financing through the store or the easy payment plan. The borrower
takes the goods home in exchange for a promise to pay later. Cars, major
appliances, and furniture are often purchased this way. You usually sign a
contract, make a down payment, and agree to pay the balance with a
specified number of equal payments called installments. The finance charges
are included in the payments. The item you purchase may be used as
security for the loan.Credit cards are issued by individual retail stores,
11
banks, or businesses. Using a credit card can be the equivalent of an interest-
free loan--if you pay for the use of it in full at the end of each month.
Credit Appraisal is a process to ascertain the risks associated with the
extension of the credit facility. It is generally carried by the financial
institutions which are involved in providing financial funding to its
customers. Credit risk is a risk related to non repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the
credibility of the customer in order to mitigate the credit risk. Proper
evaluation of the customer is performed which measures the financial
condition and the ability of the customer to repay back the loan in future.
Generally the credit facilities are extended against the security know as
collateral. But even though the loans are backed by the collateral, banks are
normally interested in the actual loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely
payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant.
Factors like age, income, number of dependents, nature of employment,
continuity of employment, repayment capacity, previous loans, credit cards,
etc. are taken into account while appraising the credit worthiness of a
person. Every bank or lending institution has its own panel of officials for
this purpose.
However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending
which must be kept in mind at all times.
banks, or businesses. Using a credit card can be the equivalent of an interest-
free loan--if you pay for the use of it in full at the end of each month.
Credit Appraisal is a process to ascertain the risks associated with the
extension of the credit facility. It is generally carried by the financial
institutions which are involved in providing financial funding to its
customers. Credit risk is a risk related to non repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the
credibility of the customer in order to mitigate the credit risk. Proper
evaluation of the customer is performed which measures the financial
condition and the ability of the customer to repay back the loan in future.
Generally the credit facilities are extended against the security know as
collateral. But even though the loans are backed by the collateral, banks are
normally interested in the actual loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely
payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant.
Factors like age, income, number of dependents, nature of employment,
continuity of employment, repayment capacity, previous loans, credit cards,
etc. are taken into account while appraising the credit worthiness of a
person. Every bank or lending institution has its own panel of officials for
this purpose.
However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending
which must be kept in mind at all times.
12
Character
Capacity
Collateral
If any one of these are missing in the equation then the lending officer must
question the viability of credit.
There is no guarantee to ensure a loan does not run into problems; however
if proper credit evaluation techniques and monitoring are implemented then
naturally the loan loss probability / problems will be minimized, which
should be the objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to
another party where that second party does not reimburse the first party
immediately, thereby generating a debt, and instead arranges either to repay
or return those resources (or material(s) of equal value) at a later date. The
first party is called a creditor, also known as a lender, while the second party
is called a debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later.
We use credit to buy things with an agreement to repay the loans over a
period of time. The most common way to avail credit is by the use of credit
cards. Other credit plans include personal loans, home loans, vehicle loans,
student loans, small business loans, trade.
Character
Capacity
Collateral
If any one of these are missing in the equation then the lending officer must
question the viability of credit.
There is no guarantee to ensure a loan does not run into problems; however
if proper credit evaluation techniques and monitoring are implemented then
naturally the loan loss probability / problems will be minimized, which
should be the objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to
another party where that second party does not reimburse the first party
immediately, thereby generating a debt, and instead arranges either to repay
or return those resources (or material(s) of equal value) at a later date. The
first party is called a creditor, also known as a lender, while the second party
is called a debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later.
We use credit to buy things with an agreement to repay the loans over a
period of time. The most common way to avail credit is by the use of credit
cards. Other credit plans include personal loans, home loans, vehicle loans,
student loans, small business loans, trade.
13
A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest.
In simple terms, a credit is an agreement of postponed payments of goods
bought or loan. With the issuance of a credit, a debt is formed.
Credit Appraisal is the process by which a lender appraises the technical
feasibility, economic viability and bankability including creditworthiness of
the prospective borrower. Credit appraisal process of a customer lies in
assessing if that customer is liable to repay the loan amount in the stipulated
time, or not. Here bank has their own methodology to determine if a
borrower is creditworthy or not. It is determined in terms of the norms and
standards set by the banks. Being a very crucial step in the sanctioning of a
loan, the borrower needs to be very careful in planning his financing modes.
However, the borrower alone doesn’t have to do all the hard work. The
banks need to be cautious, lest they end up increasing their risk exposure.
All banks employ their own unique objective, subjective, financial and non-
financial techniques to evaluate the creditworthiness of their customers.
A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest.
In simple terms, a credit is an agreement of postponed payments of goods
bought or loan. With the issuance of a credit, a debt is formed.
Credit Appraisal is the process by which a lender appraises the technical
feasibility, economic viability and bankability including creditworthiness of
the prospective borrower. Credit appraisal process of a customer lies in
assessing if that customer is liable to repay the loan amount in the stipulated
time, or not. Here bank has their own methodology to determine if a
borrower is creditworthy or not. It is determined in terms of the norms and
standards set by the banks. Being a very crucial step in the sanctioning of a
loan, the borrower needs to be very careful in planning his financing modes.
However, the borrower alone doesn’t have to do all the hard work. The
banks need to be cautious, lest they end up increasing their risk exposure.
All banks employ their own unique objective, subjective, financial and non-
financial techniques to evaluate the creditworthiness of their customers.
14
CHAPTER:-3
IMPORTANCE OF
CREDIT APPRASIAL
PROCESS
CHAPTER:-3
IMPORTANCE OF
CREDIT APPRASIAL
PROCESS
15
IMPORTANCE
Credit appraisal of a term loan denotes evaluating the proposal of the loan to
find out repayment capacity of the borrower. The primary objective is to
ensure the safety of the money of the bank and its customers. The process
involves an appraisal of market, management, technical, and financial.
Getting term loans from a financial institution is not so easy. The corporate
asking for the term loan has to go through several tests. The bank follows an
extensive process of credit appraisal before sanctioning any loan. It analyses
the loan proposal from all angles. The primary objective of credit appraisal
is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising term loans, a financial institution would focus on
evaluating the credit-worthiness of the company and future expected stream
of cash flow with the amount of risk attached to them. Credit worthiness is
assessed with parameters such as the willingness of promoters to pay the
money back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are a market, management, technical
and management.
MARKET APPRAISAL
As part of the market appraisal, the very first thing a financial institution
would look at is the gap between demand and supply. Bigger the demand-
supply gap, higher is the chances of the flourishing of that business. The
demand versus the proposed supply by the borrower should have a wide
IMPORTANCE
Credit appraisal of a term loan denotes evaluating the proposal of the loan to
find out repayment capacity of the borrower. The primary objective is to
ensure the safety of the money of the bank and its customers. The process
involves an appraisal of market, management, technical, and financial.
Getting term loans from a financial institution is not so easy. The corporate
asking for the term loan has to go through several tests. The bank follows an
extensive process of credit appraisal before sanctioning any loan. It analyses
the loan proposal from all angles. The primary objective of credit appraisal
is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising term loans, a financial institution would focus on
evaluating the credit-worthiness of the company and future expected stream
of cash flow with the amount of risk attached to them. Credit worthiness is
assessed with parameters such as the willingness of promoters to pay the
money back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are a market, management, technical
and management.
MARKET APPRAISAL
As part of the market appraisal, the very first thing a financial institution
would look at is the gap between demand and supply. Bigger the demand-
supply gap, higher is the chances of the flourishing of that business. The
demand versus the proposed supply by the borrower should have a wide
16
difference in demand of 50000 units against the proposed supply of 10000
units.
Another most important parameter is marketing efforts and infrastructure.
This is the factor which converts a demand into sales for a business. The
marketing side of the company needs to be very strong as it is very critical to
the success of the venture.
MANAGEMENT APPRAISAL
Management of the company needs to be appraised for their intentions,
knowledge, and dedication towards the project. By intention, it is meant to
evaluate the willingness of the promoters of the company to pay the money
back. It needs to evaluate the real objective of borrowing.
Only good intentions would not generate cash flows to honor the
installments of the loan. The management needs to be strong in terms of
their knowledge about business, commitment towards achieving the set
goals etc.
TECHNICAL APPRAISAL
A technical appraisal is subject to the kind of business and industry of the
borrower. If it’s a manufacturing concern, all those parameters like project
site, availability of raw material and labor, capacity utilization, vicinity to
selling market, transportation etc would be examined. A project needs to be
technically very sound to be able to sustain all business cycles.
FINANCIAL APPRAISAL
difference in demand of 50000 units against the proposed supply of 10000
units.
Another most important parameter is marketing efforts and infrastructure.
This is the factor which converts a demand into sales for a business. The
marketing side of the company needs to be very strong as it is very critical to
the success of the venture.
MANAGEMENT APPRAISAL
Management of the company needs to be appraised for their intentions,
knowledge, and dedication towards the project. By intention, it is meant to
evaluate the willingness of the promoters of the company to pay the money
back. It needs to evaluate the real objective of borrowing.
Only good intentions would not generate cash flows to honor the
installments of the loan. The management needs to be strong in terms of
their knowledge about business, commitment towards achieving the set
goals etc.
TECHNICAL APPRAISAL
A technical appraisal is subject to the kind of business and industry of the
borrower. If it’s a manufacturing concern, all those parameters like project
site, availability of raw material and labor, capacity utilization, vicinity to
selling market, transportation etc would be examined. A project needs to be
technically very sound to be able to sustain all business cycles.
FINANCIAL APPRAISAL
17
After all the other kinds of appraisal, everything boils down to financial
appraisal. This probably is the most important part of credit appraisal of
business loans. The reason is that it expresses everything in terms of money.
Financial appraisal tries to assess the correctness or reasonability of the
estimates of costs and expenses and also the projected revenues. These may
include the estimation of the selling price, cost of machinery, the overall cost
of the project and the means of financing.
Financial appraisal involves extensive financial modeling in excel.
Basically, it takes the financial statements of previous periods and forecasts
the future financial position for at least till the loan matures. From that, the
cash flows of each year are compared with the installment of loan because
ultimately the cash flows are going to honor the payments of the bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of
the firm. Debt service coverage ratio is a key ratio which is calculated for
each future financial period and if that ratio is satisfying the norms accepted
by the bank, the loan would get another green signal.
It is difficult to explain the process of appraisal in an article or even a set of
articles. It is a very extensive work being done at financial institutions. They
have a separate team of professionals for conducting such project appraisals.
Components of Credit Appraisal Process
While assessing a customer, the bank needs to know the following
information: Incomes of applicants and co-applicants, age of applicants,
educational qualifications, profession, experience, additional sources of
income, past loan record, family history, employer/business, security of
After all the other kinds of appraisal, everything boils down to financial
appraisal. This probably is the most important part of credit appraisal of
business loans. The reason is that it expresses everything in terms of money.
Financial appraisal tries to assess the correctness or reasonability of the
estimates of costs and expenses and also the projected revenues. These may
include the estimation of the selling price, cost of machinery, the overall cost
of the project and the means of financing.
Financial appraisal involves extensive financial modeling in excel.
Basically, it takes the financial statements of previous periods and forecasts
the future financial position for at least till the loan matures. From that, the
cash flows of each year are compared with the installment of loan because
ultimately the cash flows are going to honor the payments of the bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of
the firm. Debt service coverage ratio is a key ratio which is calculated for
each future financial period and if that ratio is satisfying the norms accepted
by the bank, the loan would get another green signal.
It is difficult to explain the process of appraisal in an article or even a set of
articles. It is a very extensive work being done at financial institutions. They
have a separate team of professionals for conducting such project appraisals.
Components of Credit Appraisal Process
While assessing a customer, the bank needs to know the following
information: Incomes of applicants and co-applicants, age of applicants,
educational qualifications, profession, experience, additional sources of
income, past loan record, family history, employer/business, security of
18
tenure, tax history, assets of applicants and their financing pattern, recurring
liabilities, other present and future liabilities and investments (if any). Out of
these, the incomes of applicants are the most important criteria to understand
and calculate the credit worthiness of the applicants. As stated earlier, the
actual norms decided by banks differ greatly. Each has certain norms within
which the customer needs to fit in to be eligible for a loan. Based on these
parameters, the maximum amount of loan that the bank can sanction and the
customer is eligible for is worked out. The broad tools to determine
eligibility remain the same for all banks.
MEANING OF CREDIT APPRAISAL:
Credit appraisal is the assessment of the viability of proposed longterm
investments in terms of shareholder wealth and the formal analysis of all
project costs and benefits which is used to justify the project proposal.
Effective project appraisal offers significant benefits to a firm.
A good appraisal justifies spending money on a project. Credit appraisal or
project planning must be viewed as a process of decision- making over time,
starting with project identification, and proceeding through various stages of
various feasibility studies (for example, engineering, financial etc), then the
investment phase, and finally project evaluation. This is the so-called
concept of the project cycle.
Getting the design and operation of appraisal systems right is important.
The proper consideration of each of the key components of project appraisal
is essential. These are,Key issues in appraising projects include the
following.
tenure, tax history, assets of applicants and their financing pattern, recurring
liabilities, other present and future liabilities and investments (if any). Out of
these, the incomes of applicants are the most important criteria to understand
and calculate the credit worthiness of the applicants. As stated earlier, the
actual norms decided by banks differ greatly. Each has certain norms within
which the customer needs to fit in to be eligible for a loan. Based on these
parameters, the maximum amount of loan that the bank can sanction and the
customer is eligible for is worked out. The broad tools to determine
eligibility remain the same for all banks.
MEANING OF CREDIT APPRAISAL:
Credit appraisal is the assessment of the viability of proposed longterm
investments in terms of shareholder wealth and the formal analysis of all
project costs and benefits which is used to justify the project proposal.
Effective project appraisal offers significant benefits to a firm.
A good appraisal justifies spending money on a project. Credit appraisal or
project planning must be viewed as a process of decision- making over time,
starting with project identification, and proceeding through various stages of
various feasibility studies (for example, engineering, financial etc), then the
investment phase, and finally project evaluation. This is the so-called
concept of the project cycle.
Getting the design and operation of appraisal systems right is important.
The proper consideration of each of the key components of project appraisal
is essential. These are,Key issues in appraising projects include the
following.
19
Need, targeting and objectives
The starting point for appraisal: applicants should provide a detailed
description of the project, identifying the local need it aims to meet.
Appraisal helps show if the project is the right response, and highlight what
the project is supposed to do and for whom. Options
Options analysis is concerned with establishing whether there are different
ways of achieving objectives. This is a particularly complex part of project
appraisal, and one where guidance varies. It is vital though to review
different ways of meeting local need and key objectives.
Inputs
It’s important to ensure that all the necessary people and resources are in
place to deliver the project. This may mean thinking about funding from
various sources and other inputs, such as volunteer help or premises.
Appraisal should include the examination of appropriately detailed budgets.
Outputs and outcomes
Detailed consideration must be given in appraisal to what a project does and
achieves: its outputs and more importantly its longer-term outcomes.
Benefits to neighborhoods and their residents are reflected in the improved
quality of life outcomes (jobs, better housing, safety, health and so on), and
appraisals consider if these are realistic.
Need, targeting and objectives
The starting point for appraisal: applicants should provide a detailed
description of the project, identifying the local need it aims to meet.
Appraisal helps show if the project is the right response, and highlight what
the project is supposed to do and for whom. Options
Options analysis is concerned with establishing whether there are different
ways of achieving objectives. This is a particularly complex part of project
appraisal, and one where guidance varies. It is vital though to review
different ways of meeting local need and key objectives.
Inputs
It’s important to ensure that all the necessary people and resources are in
place to deliver the project. This may mean thinking about funding from
various sources and other inputs, such as volunteer help or premises.
Appraisal should include the examination of appropriately detailed budgets.
Outputs and outcomes
Detailed consideration must be given in appraisal to what a project does and
achieves: its outputs and more importantly its longer-term outcomes.
Benefits to neighborhoods and their residents are reflected in the improved
quality of life outcomes (jobs, better housing, safety, health and so on), and
appraisals consider if these are realistic.
20
CHAPTER:-4
BRIEF STUDY ON
CREDIT APPRAISAL
PROCESS
CHAPTER:-4
BRIEF STUDY ON
CREDIT APPRAISAL
PROCESS
21
TYPES OF CREDIT
Credit can be of two types fund base & non-fund base:
FUND BASED includes:
Working Capital
Term Loan
NON-FUND BASED includes:
Letter of Credit
Bank Guarantee
FUND BASED:-
WORKING CAPITAL: -
1. GENERAL
The objective of running any industry is earning profits. An industry will
require funds to acquire
“Fixed assets” like land, building, plant, machinery, equipments, vehicles,
tools etc., & also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales.
For production, funds are needed for purchase of raw materials/ stores/ fuel,
TYPES OF CREDIT
Credit can be of two types fund base & non-fund base:
FUND BASED includes:
Working Capital
Term Loan
NON-FUND BASED includes:
Letter of Credit
Bank Guarantee
FUND BASED:-
WORKING CAPITAL: -
1. GENERAL
The objective of running any industry is earning profits. An industry will
require funds to acquire
“Fixed assets” like land, building, plant, machinery, equipments, vehicles,
tools etc., & also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales.
For production, funds are needed for purchase of raw materials/ stores/ fuel,
22
for employment of labour, for power charges etc., for storing finishing goods
till they are sold out & for financing the sales by way of sundry debtors/
receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed
capital & working capital. Working capital in this context is the excess of
current assets over current liabilities. The excess of current assets over
current liabilities is treated as net working capital or liquid surplus &
represents that portion of the working capital which has been provided from
the long term source.
2. Definition
Working capital is defined as the funds required to carry the required levels
of current assets to enable the unit to carry on its operations at the expected
levels uninterruptedly.
Thus Working Capital Required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production &
sales)
(b) The activity carried on viz. mfg process, product, production
programme, the materials & marketing mix.
for employment of labour, for power charges etc., for storing finishing goods
till they are sold out & for financing the sales by way of sundry debtors/
receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed
capital & working capital. Working capital in this context is the excess of
current assets over current liabilities. The excess of current assets over
current liabilities is treated as net working capital or liquid surplus &
represents that portion of the working capital which has been provided from
the long term source.
2. Definition
Working capital is defined as the funds required to carry the required levels
of current assets to enable the unit to carry on its operations at the expected
levels uninterruptedly.
Thus Working Capital Required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production &
sales)
(b) The activity carried on viz. mfg process, product, production
programme, the materials & marketing mix.
23
3. METHODS & APPLICATION
SEGMENT LIMITS METHOD
SSI Upto Rs 5 cr Traditional Method & Nayak Committee method
Above Rs 5 cr Projected Balance Sheet Method
SBF All loans Traditional / Turnover Method
C&I Trade &
Services
Upto Rs 1 cr Traditional Method for Trade &
Projected Turnover Method
Above Rs 1 cr
& upto Rs 5 cr
Projected Balance Sheet Method &
Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
C&I Industrial
Units
Below
Rs 25 lacs
Traditional Method
Rs 25 lacs &
Over but upto
Rs 5 cr
Projected Balance Sheet Method &
Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
TERM LOAN
1. A term loan is granted for a fixed term of not less than 3 years
intended normally for financing fixed assets acquired with a
repayment schedule normally not exceeding 8 years.
2. A term loan is a loan granted for the purpose of capital assets, such as
purchase of land, construction of, buildings, purchase of machinery,
modernization, renovation or rationalization of plant, & repayable
from out of the future earning of the enterprise, in installments, as per
a prearranged schedule.
From the above definition, the following differences between a term
loan & the working capital credit afforded by the Bank are apparent:
The purpose of the term loan is for acquisition of capital assets.
3. METHODS & APPLICATION
SEGMENT LIMITS METHOD
SSI Upto Rs 5 cr Traditional Method & Nayak Committee method
Above Rs 5 cr Projected Balance Sheet Method
SBF All loans Traditional / Turnover Method
C&I Trade &
Services
Upto Rs 1 cr Traditional Method for Trade &
Projected Turnover Method
Above Rs 1 cr
& upto Rs 5 cr
Projected Balance Sheet Method &
Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
C&I Industrial
Units
Below
Rs 25 lacs
Traditional Method
Rs 25 lacs &
Over but upto
Rs 5 cr
Projected Balance Sheet Method &
Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
TERM LOAN
1. A term loan is granted for a fixed term of not less than 3 years
intended normally for financing fixed assets acquired with a
repayment schedule normally not exceeding 8 years.
2. A term loan is a loan granted for the purpose of capital assets, such as
purchase of land, construction of, buildings, purchase of machinery,
modernization, renovation or rationalization of plant, & repayable
from out of the future earning of the enterprise, in installments, as per
a prearranged schedule.
From the above definition, the following differences between a term
loan & the working capital credit afforded by the Bank are apparent:
The purpose of the term loan is for acquisition of capital assets.
24
The term loan is an advance not repayable on demand but only in
installments ranging over a period of years.
The repayment of term loan is not out of sale proceeds of the
goods & commodities per se, whether given as security or not.
The repayment should come out of the future cash accruals from
the activity of the unit.
The security is not the readily saleable goods & commodities but
the fixed assets of the units.
3. It may thus be observed that the scope & operation of the term loans
are entirely different from those of the conventional working capital
advances. The Bank’s commitment is for a long period & the risk
involved is greater. An element of risk is inherent in any type of loan
because of the uncertainty of the repayment. Longer the duration of
the credit, greater is the attendant uncertainty of repayment &
consequently the risk involved also becomes greater.
4. However, it may be observed that term loans are not so lacking in
liquidity as they appear to be. These loans are subject to a definite
repayment programme unlike short term loans for working capital
(especially the cash credits) which are being renewed year after year.
Term loans would be repaid in a regular way from the anticipated
income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from
the short term credit granted by the banks & it becomes necessary
The term loan is an advance not repayable on demand but only in
installments ranging over a period of years.
The repayment of term loan is not out of sale proceeds of the
goods & commodities per se, whether given as security or not.
The repayment should come out of the future cash accruals from
the activity of the unit.
The security is not the readily saleable goods & commodities but
the fixed assets of the units.
3. It may thus be observed that the scope & operation of the term loans
are entirely different from those of the conventional working capital
advances. The Bank’s commitment is for a long period & the risk
involved is greater. An element of risk is inherent in any type of loan
because of the uncertainty of the repayment. Longer the duration of
the credit, greater is the attendant uncertainty of repayment &
consequently the risk involved also becomes greater.
4. However, it may be observed that term loans are not so lacking in
liquidity as they appear to be. These loans are subject to a definite
repayment programme unlike short term loans for working capital
(especially the cash credits) which are being renewed year after year.
Term loans would be repaid in a regular way from the anticipated
income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from
the short term credit granted by the banks & it becomes necessary
25
therefore, to adopt a different approach in examining the applications
of borrowers for such credit & for appraising such proposals.
6. The repayment of a term loan depends on the future income of the
borrowing unit. Hence, the primary task of the bank before granting
term loans is to assure itself that the anticipated income from the unit
would provide the necessary amount for the repayment of the loan.
This will involve a detailed scrutiny of the scheme, its financial
aspects, economic aspects, technical aspects, a projection of future
trends of outputs & sales & estimates of cost, returns, flow of funds &
profits.
Appraisal of Term Loans
Appraisal of term loan for, say, an industrial unit is a process comprising
several steps.
There are four broad aspects of appraisal, namely
Technical Feasibility - To determine the suitability of the
technology selected & the adequacy of the technical
investigation & design;
Economic Feasibility - To ascertain the extent of profitability of
the project & its sufficiency in relation to the repayment
obligations pertaining to term assistance;
therefore, to adopt a different approach in examining the applications
of borrowers for such credit & for appraising such proposals.
6. The repayment of a term loan depends on the future income of the
borrowing unit. Hence, the primary task of the bank before granting
term loans is to assure itself that the anticipated income from the unit
would provide the necessary amount for the repayment of the loan.
This will involve a detailed scrutiny of the scheme, its financial
aspects, economic aspects, technical aspects, a projection of future
trends of outputs & sales & estimates of cost, returns, flow of funds &
profits.
Appraisal of Term Loans
Appraisal of term loan for, say, an industrial unit is a process comprising
several steps.
There are four broad aspects of appraisal, namely
Technical Feasibility - To determine the suitability of the
technology selected & the adequacy of the technical
investigation & design;
Economic Feasibility - To ascertain the extent of profitability of
the project & its sufficiency in relation to the repayment
obligations pertaining to term assistance;
26
Financial Feasibility - To determine the accuracy of cost
estimates, suitability of the envisaged pattern of financing &
general soundness of the capital structure; &
Managerial Competency – To ascertain that competent men are
behind the project to ensure its successful implementation &
efficient management after commencement of commercial
production.
Technical Feasibility
The examination of this item consists of an assessment of the various
requirement of the actual production process. It is in short a study of the
availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical
feasibility & hence special attention will have to be paid to this
feature. Projects whose technical requirements could have been
taken care of in one location sometimes fail because they are
established in another place where conditions are less favorable.
One project was located near a river to facilitate easy
transportation by barge but lower water level in certain seasons
made essential transportation almost impossible. Too many
projects have become uneconomical because sufficient care has not
Financial Feasibility - To determine the accuracy of cost
estimates, suitability of the envisaged pattern of financing &
general soundness of the capital structure; &
Managerial Competency – To ascertain that competent men are
behind the project to ensure its successful implementation &
efficient management after commencement of commercial
production.
Technical Feasibility
The examination of this item consists of an assessment of the various
requirement of the actual production process. It is in short a study of the
availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical
feasibility & hence special attention will have to be paid to this
feature. Projects whose technical requirements could have been
taken care of in one location sometimes fail because they are
established in another place where conditions are less favorable.
One project was located near a river to facilitate easy
transportation by barge but lower water level in certain seasons
made essential transportation almost impossible. Too many
projects have become uneconomical because sufficient care has not
27
been taken in the location of the project, e.g. a woolen scouring &
spinning mill needed large quantities of good water but was
located in a place which lacked ordinary supply of water & the
limited water supply available also required efficient softening
treatment. The accessibility to the various resources has meaning
only with reference to location. Inadequate transport facilities or
lack of sufficient power or water for instance, can adversely affect
an otherwise sound industrial project.
b) Size of the plant – One of the most important considerations
affecting the feasibility of a new industrial enterprise is the right
size of the plant. The size of the plant will be such that it will give
an economic product which will be competitive when compared to
the alternative product available in the market. A smaller plant
than the optimum size may result in increased production costs &
may not be able to sell its products at competitive prices.
c) Type of technology – An important feature of the feasibility relates
to the type of technology to be adopted for a project. A new
technology will have to be fully examined & tired before it is
adopted. It is equally important to avoid adopting equipment or
processes which are absolute or likely to become outdated soon.
The principle underlying the technological selection is that “a
developing country cannot afford to be the first to adopt the new
nor yet the last to cast the old aside”.
d) Labour – The labour requirements of a project, need to be assessed
with special care. Though labour in terms of unemployed persons
been taken in the location of the project, e.g. a woolen scouring &
spinning mill needed large quantities of good water but was
located in a place which lacked ordinary supply of water & the
limited water supply available also required efficient softening
treatment. The accessibility to the various resources has meaning
only with reference to location. Inadequate transport facilities or
lack of sufficient power or water for instance, can adversely affect
an otherwise sound industrial project.
b) Size of the plant – One of the most important considerations
affecting the feasibility of a new industrial enterprise is the right
size of the plant. The size of the plant will be such that it will give
an economic product which will be competitive when compared to
the alternative product available in the market. A smaller plant
than the optimum size may result in increased production costs &
may not be able to sell its products at competitive prices.
c) Type of technology – An important feature of the feasibility relates
to the type of technology to be adopted for a project. A new
technology will have to be fully examined & tired before it is
adopted. It is equally important to avoid adopting equipment or
processes which are absolute or likely to become outdated soon.
The principle underlying the technological selection is that “a
developing country cannot afford to be the first to adopt the new
nor yet the last to cast the old aside”.
d) Labour – The labour requirements of a project, need to be assessed
with special care. Though labour in terms of unemployed persons
28
is abundant in the country, there is shortage of trained personnel.
The quality of labour required & the training facilities made
available to the unit will have to be taken into account
e) Technical Report – A technical report using the Bank’s
Consultancy Cell, external consultants, etc., should be obtained
with specific comments on the feasibility of scheme, its
profitability, whether machinery proposed to be acquired by the
unit under the scheme will be sufficient for all stages of
production, the extent of competition prevailing, marketability of
the products etc., wherever necessary.
Economic Feasibility
An economic feasibility appraisal has reference to the earning capacity of
the project. Since earnings depend on the volume of sales, it is necessary to
determine how much output or the additional production from an established
unit the market is likely to absorb at given prices.
a) A thorough market analysis is one of the most essential parts of
project investigation. This involves getting answers to three questions.
a) How big is the market?
b) How much it is likely to grow?
c) How much of it can the project capture?
The first step in this direction is to consider the current situation, taking
account of the total output of the product concerned & the existing demand
for it with a view to establishing whether there is unsatisfied demand for the
is abundant in the country, there is shortage of trained personnel.
The quality of labour required & the training facilities made
available to the unit will have to be taken into account
e) Technical Report – A technical report using the Bank’s
Consultancy Cell, external consultants, etc., should be obtained
with specific comments on the feasibility of scheme, its
profitability, whether machinery proposed to be acquired by the
unit under the scheme will be sufficient for all stages of
production, the extent of competition prevailing, marketability of
the products etc., wherever necessary.
Economic Feasibility
An economic feasibility appraisal has reference to the earning capacity of
the project. Since earnings depend on the volume of sales, it is necessary to
determine how much output or the additional production from an established
unit the market is likely to absorb at given prices.
a) A thorough market analysis is one of the most essential parts of
project investigation. This involves getting answers to three questions.
a) How big is the market?
b) How much it is likely to grow?
c) How much of it can the project capture?
The first step in this direction is to consider the current situation, taking
account of the total output of the product concerned & the existing demand
for it with a view to establishing whether there is unsatisfied demand for the
29
product. Care should be taken to see that there is no idle capacity in the
existing industries.
ii) Future – possible future changes in the volume & patterns of supply &
demand will have to be estimated in order to assess the long term prospects
of the industry. Forecasting of demand is a complicated matter but one of the
vital importance. It is complicated because a variety of factors affect the
demand for product e.g. technological advances could bring substitutes into
market while changes in tastes & consumer preference might cause sizable
shifts in demand.
iii) Intermediate product – The demand for “Intermediate product” will
depend upon the demand & supply of the ultimate product (e.g. jute bags,
paper for printing, parts for machines, tyres for automobiles). The market
analysis in this case should cover the market for the ultimate product.
Financial Feasibility
The basis data required for the financial feasibility appraisal can be broadly
grouped under the following heads
i) Cost of the project including working capital
ii) Cost of production & estimates of profitability
iii) Cash flow estimates & sources of finance.
The cash flow estimates will help to decide the disbursal of the term loan.
The estimate of profitability & the breakeven point will enable the banker to
draw up the repayment programme, start-up time etc. The profitability
estimates will also give the estimate of the Debt Service Coverage which is
the most important single factor in all the term credit analysis.
product. Care should be taken to see that there is no idle capacity in the
existing industries.
ii) Future – possible future changes in the volume & patterns of supply &
demand will have to be estimated in order to assess the long term prospects
of the industry. Forecasting of demand is a complicated matter but one of the
vital importance. It is complicated because a variety of factors affect the
demand for product e.g. technological advances could bring substitutes into
market while changes in tastes & consumer preference might cause sizable
shifts in demand.
iii) Intermediate product – The demand for “Intermediate product” will
depend upon the demand & supply of the ultimate product (e.g. jute bags,
paper for printing, parts for machines, tyres for automobiles). The market
analysis in this case should cover the market for the ultimate product.
Financial Feasibility
The basis data required for the financial feasibility appraisal can be broadly
grouped under the following heads
i) Cost of the project including working capital
ii) Cost of production & estimates of profitability
iii) Cash flow estimates & sources of finance.
The cash flow estimates will help to decide the disbursal of the term loan.
The estimate of profitability & the breakeven point will enable the banker to
draw up the repayment programme, start-up time etc. The profitability
estimates will also give the estimate of the Debt Service Coverage which is
the most important single factor in all the term credit analysis.
30
NON-FUND BASED:-
LETTER OF CREDIT
Introduction
The expectation of the seller of any goods or services is that he should get
the payment immediately on delivery of the same. This may not materialize
if the seller & the buyer are at different places (either within the same
country or in different countries). The seller desires to have an assurance for
payment by the purchaser. At the same time the purchaser desires that the
amount should be paid only when the goods are actually received. Here
arises the need of Letter of Credit (LCs). The objective of LC is to provide a
means of payment to the seller & the delivery of goods & services to the
buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank)
acting at the request & on the instructions of the customer (the applicant) or
on its own behalf,
i. is to make a payment to or to the order of a third party (the
beneficiary), or is to accept & pay bills of exchange (drafts drawn by
the beneficiary); or
ii. authorizes another bank to effect such payment, or to accept & pay
such bills of exchanges (drafts); or
iii. authorizes another bank to negotiate against stipulated document(s),
provided that the terms & conditions of the credit are complied with.
NON-FUND BASED:-
LETTER OF CREDIT
Introduction
The expectation of the seller of any goods or services is that he should get
the payment immediately on delivery of the same. This may not materialize
if the seller & the buyer are at different places (either within the same
country or in different countries). The seller desires to have an assurance for
payment by the purchaser. At the same time the purchaser desires that the
amount should be paid only when the goods are actually received. Here
arises the need of Letter of Credit (LCs). The objective of LC is to provide a
means of payment to the seller & the delivery of goods & services to the
buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank)
acting at the request & on the instructions of the customer (the applicant) or
on its own behalf,
i. is to make a payment to or to the order of a third party (the
beneficiary), or is to accept & pay bills of exchange (drafts drawn by
the beneficiary); or
ii. authorizes another bank to effect such payment, or to accept & pay
such bills of exchanges (drafts); or
iii. authorizes another bank to negotiate against stipulated document(s),
provided that the terms & conditions of the credit are complied with.
31
Basic Principle:
The basic principle behind an LC is to facilitate orderly movement of trade;
it is therefore necessary that the evidence of movement of goods is present.
Hence documentary LCs is those which contains documents of title to goods
as part of the LC documents. Clean bills which do not have document of title
to goods are not normally established by banks. Bankers and all concerned
deal only in documents & not in goods. If documents are in order issuing
bank will pay irrespective of whether the goods are of expected quality or
not. Banks are also not responsible for the genuineness of the documents &
quantity/quality of goods. If importer is your borrower, the bank has to
advice him to convert all his requirements in the form of documents to
ensure quantity & quality of goods.
Parties to the LC
1) Applicant – The buyer who applies for opening LC
2) Beneficiary – The seller who supplies goods
3) Issuing Bank – The Bank which opens the LC
4) Advising Bank – The Bank which advises the LC after confirming
authenticity
5) Negotiating Bank – The Bank which negotiates the documents
6) Confirming Bank – The Bank which adds its confirmation to the
LC
7) Reimbursing Bank – The Bank which reimburses the LC amount
to negotiating bank
Basic Principle:
The basic principle behind an LC is to facilitate orderly movement of trade;
it is therefore necessary that the evidence of movement of goods is present.
Hence documentary LCs is those which contains documents of title to goods
as part of the LC documents. Clean bills which do not have document of title
to goods are not normally established by banks. Bankers and all concerned
deal only in documents & not in goods. If documents are in order issuing
bank will pay irrespective of whether the goods are of expected quality or
not. Banks are also not responsible for the genuineness of the documents &
quantity/quality of goods. If importer is your borrower, the bank has to
advice him to convert all his requirements in the form of documents to
ensure quantity & quality of goods.
Parties to the LC
1) Applicant – The buyer who applies for opening LC
2) Beneficiary – The seller who supplies goods
3) Issuing Bank – The Bank which opens the LC
4) Advising Bank – The Bank which advises the LC after confirming
authenticity
5) Negotiating Bank – The Bank which negotiates the documents
6) Confirming Bank – The Bank which adds its confirmation to the
LC
7) Reimbursing Bank – The Bank which reimburses the LC amount
to negotiating bank
32
8) Second beneficiary – The additional beneficiary in case of
transferable LCs
Confirming bank may not be there in a transaction unless the beneficiary
demand confirmation by his own bankers & such a request is made part of
LC terms. A bank will confirm an LC for his beneficiary if opening bank
requests this as part of LC terms. Reimbursing bank is used in an LC
transaction by an opening bank when the bank does not have a direct
correspondent/branch through whom the negotiating bank can be
reimbursed. Here, the opening bank will direct the reimbursing bank to
reimburse the negotiating bank with the payment made to the beneficiary. In
the case of transferable LC, the LC may be transferred to the second
beneficiary & if provided in the LC it can be transferred even more than
once.
Types of Letter of Credit:-
a) Revocable & Irrevocable:
As the name suggests, revocable LCs are those that can be revoked by
the issuing bank & hence are not in commercial use. Irrevocable LCs
cannot be revoked/ cancelled/ amended without the prior concern of
all the parties to the LC.
b) Confirmed LC:
The seller may ask for the confirmation of the LC by a bank in his
own country if he is not satisfied about the issuing bank’s credentials.
c) Sight/ Usance LCs:
8) Second beneficiary – The additional beneficiary in case of
transferable LCs
Confirming bank may not be there in a transaction unless the beneficiary
demand confirmation by his own bankers & such a request is made part of
LC terms. A bank will confirm an LC for his beneficiary if opening bank
requests this as part of LC terms. Reimbursing bank is used in an LC
transaction by an opening bank when the bank does not have a direct
correspondent/branch through whom the negotiating bank can be
reimbursed. Here, the opening bank will direct the reimbursing bank to
reimburse the negotiating bank with the payment made to the beneficiary. In
the case of transferable LC, the LC may be transferred to the second
beneficiary & if provided in the LC it can be transferred even more than
once.
Types of Letter of Credit:-
a) Revocable & Irrevocable:
As the name suggests, revocable LCs are those that can be revoked by
the issuing bank & hence are not in commercial use. Irrevocable LCs
cannot be revoked/ cancelled/ amended without the prior concern of
all the parties to the LC.
b) Confirmed LC:
The seller may ask for the confirmation of the LC by a bank in his
own country if he is not satisfied about the issuing bank’s credentials.
c) Sight/ Usance LCs:
33
In case of the sight LCs beneficiary gets immediate payment upon
presentation of the documents while in the case of usance, the
payment is made after a certain period as per the LC terms. Sight LCs
have to be paid by the drawee (buyer) immediately whereas he gets
credit as per LC terms under Usance LCs.
d) LC with advance payment to the seller:
The LC which authorizes the advising bank to advance a part of LC
amount to the seller to meet pre-shipment expenses is known as Red
Clause Letter of Credit. The seller gives the receipt & an undertaking
to present the documents before the LC expires. Advance amount
would be adjusted from the proceeds of the export documents.
However, the risk is assumed by the buyer. When the Red Clause LC
provides for the cost of shortage facilities at the port of shipment in
addition to the pre-shipment advance to the beneficiary it is called
Green Clause LC. The goods are stored in the name of the issuing
bank.
e) Revolving LC:
Under this, the issuing bank undertakes to restore the credit to the
original amount after it has been utilized. Number of such utilization
& the period of time by which this should take place are stipulated in
the LC. On receipt of bill payment advise the LC amount gets
reinstated.
f) Transferable LCs:
In case of the sight LCs beneficiary gets immediate payment upon
presentation of the documents while in the case of usance, the
payment is made after a certain period as per the LC terms. Sight LCs
have to be paid by the drawee (buyer) immediately whereas he gets
credit as per LC terms under Usance LCs.
d) LC with advance payment to the seller:
The LC which authorizes the advising bank to advance a part of LC
amount to the seller to meet pre-shipment expenses is known as Red
Clause Letter of Credit. The seller gives the receipt & an undertaking
to present the documents before the LC expires. Advance amount
would be adjusted from the proceeds of the export documents.
However, the risk is assumed by the buyer. When the Red Clause LC
provides for the cost of shortage facilities at the port of shipment in
addition to the pre-shipment advance to the beneficiary it is called
Green Clause LC. The goods are stored in the name of the issuing
bank.
e) Revolving LC:
Under this, the issuing bank undertakes to restore the credit to the
original amount after it has been utilized. Number of such utilization
& the period of time by which this should take place are stipulated in
the LC. On receipt of bill payment advise the LC amount gets
reinstated.
f) Transferable LCs:
34
Transferable LC are transferable in whole or in part to one or more
beneficiaries depending on the terms of LC. As per UCPDC stipulated
in the LC, all LC are not transferable.
g) Back to back LCs:
When the bank opens new LCs against the backing of an LC received
by a beneficiary having the first LC as security for the new LCs
opened, the transaction is referred to as Back to Back. For example let
us assume a customer A, who exports marine products by buying
them from a number of suppliers. If A receives an LC for USD
100000 for shipment of marine products & he approaches the Bank
for opening LCs in favour of his suppliers of marine products within
the original value & in keeping with the terms of the original LC these
new LCs are opened against the backing of the original LC. This is the
back to back transaction. However, it may be noted that this
arrangement is not under the provisions of UCPDC though the
individual LCs are governed by it.
BANK GUARANTEES
A contract of guarantee is defined as ‘a contract to perform the promise or
discharge the liability of the third person in case of the default’. The parties
to the contract of guarantees are:
a) Applicant: The principal debtor – person at whose request the
guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can
enforce it in case of default.
Transferable LC are transferable in whole or in part to one or more
beneficiaries depending on the terms of LC. As per UCPDC stipulated
in the LC, all LC are not transferable.
g) Back to back LCs:
When the bank opens new LCs against the backing of an LC received
by a beneficiary having the first LC as security for the new LCs
opened, the transaction is referred to as Back to Back. For example let
us assume a customer A, who exports marine products by buying
them from a number of suppliers. If A receives an LC for USD
100000 for shipment of marine products & he approaches the Bank
for opening LCs in favour of his suppliers of marine products within
the original value & in keeping with the terms of the original LC these
new LCs are opened against the backing of the original LC. This is the
back to back transaction. However, it may be noted that this
arrangement is not under the provisions of UCPDC though the
individual LCs are governed by it.
BANK GUARANTEES
A contract of guarantee is defined as ‘a contract to perform the promise or
discharge the liability of the third person in case of the default’. The parties
to the contract of guarantees are:
a) Applicant: The principal debtor – person at whose request the
guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can
enforce it in case of default.
35
c) Guarantee: The person who undertakes to discharge the obligations of
the applicant in case of his default.
Thus, guarantee is a collateral contract, consequential to a main contract
between the applicant & the beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both both preventive & remedial purposes.
The guarantees executed by banks comprises both performance guarantees
& financial guarantees. The guarantees are structured according to the terms
of agreement, viz., security, maturity & purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in
tenders;
b) Mobilization advance or advance money before commencement of the
project by the contractor & for money to be received in various stages
like plant layout, design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers
& for obtaining full payment of the bills;
e) Performance guarantee for warranty period on completion of contract
which would enable the suppliers to realize the proceeds without
waiting for warranty period to be over;
f) To allow units to draw funds from time to time from the concerned
indenters against part execution of contracts, etc.
c) Guarantee: The person who undertakes to discharge the obligations of
the applicant in case of his default.
Thus, guarantee is a collateral contract, consequential to a main contract
between the applicant & the beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both both preventive & remedial purposes.
The guarantees executed by banks comprises both performance guarantees
& financial guarantees. The guarantees are structured according to the terms
of agreement, viz., security, maturity & purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in
tenders;
b) Mobilization advance or advance money before commencement of the
project by the contractor & for money to be received in various stages
like plant layout, design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers
& for obtaining full payment of the bills;
e) Performance guarantee for warranty period on completion of contract
which would enable the suppliers to realize the proceeds without
waiting for warranty period to be over;
f) To allow units to draw funds from time to time from the concerned
indenters against part execution of contracts, etc.
36
g) Bid bonds on behalf of exporters
h) Export performance guarantees on behalf of exporters favouring the
Customs Department under EPCG scheme.
Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision of
financial guarantees & exercise due caution with regards to performance
guarantee business. The subtle difference between the two types of
guarantees is that under a financial guarantee, a bank guarantee’s a customer
financial worth, creditworthiness & his capacity to take up financial risks. In
a performance guarantee, the bank’s guarantee obligations relate to the
performance related obligations of the applicant (customer).
While issuing financial guarantees, it should be ensured that customers
should be in a position to reimburse the Bank in case the Bank is required to
make the payment under the guarantee. In case of performance guarantee,
branches should exercise due caution & have sufficient experience with the
customer to satisfy themselves that the customer has the necessary
experience, capacity, expertise, & means to perform the obligations under
the contract & any default is not likely to occur.
Branches should not issue guarantees for a period more than 18 months
without prior reference to the controlling authority. Extant instructions
stipulate an Administrative Clearance for issue of BGs for a period in excess
of 18 months. However, in cases where requests are received for extension
of the period of BGs as long as the fresh period of extension is within 18
months. No bank guarantee should normally have a maturity of more than 10
g) Bid bonds on behalf of exporters
h) Export performance guarantees on behalf of exporters favouring the
Customs Department under EPCG scheme.
Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision of
financial guarantees & exercise due caution with regards to performance
guarantee business. The subtle difference between the two types of
guarantees is that under a financial guarantee, a bank guarantee’s a customer
financial worth, creditworthiness & his capacity to take up financial risks. In
a performance guarantee, the bank’s guarantee obligations relate to the
performance related obligations of the applicant (customer).
While issuing financial guarantees, it should be ensured that customers
should be in a position to reimburse the Bank in case the Bank is required to
make the payment under the guarantee. In case of performance guarantee,
branches should exercise due caution & have sufficient experience with the
customer to satisfy themselves that the customer has the necessary
experience, capacity, expertise, & means to perform the obligations under
the contract & any default is not likely to occur.
Branches should not issue guarantees for a period more than 18 months
without prior reference to the controlling authority. Extant instructions
stipulate an Administrative Clearance for issue of BGs for a period in excess
of 18 months. However, in cases where requests are received for extension
of the period of BGs as long as the fresh period of extension is within 18
months. No bank guarantee should normally have a maturity of more than 10
37
years. Bank guarantee beyond maturity of 10 years may be considered
against 100% cash margin with prior approval of the controlling authority.
More than ordinary care is required to be executed while issuing guarantees
on behalf of customers who enjoy credit facilities with other banks.
Unsecured guarantees, where furnished by exception, should be for a short
period & for relatively small amounts. All deferred payment guarantee
should ordinarily be secured
Appraisal of Bank Guarantee Limit
Proposals for guarantees shall be appraised with the same diligence as in the
case of fund-base limits. Branches may obtain adequate cover by way of
margin & security so as to prevent default on payments when guarantees are
invoked. Whenever an application for the issue of bank guarantee is
received, branches should examine & satisfy themselves about the following
aspects:
a) The need of the bank guarantee & whether it is related to the
applicant’s normal trade/business.
b) Whether the requirement is one time or on the regular basis
c) The nature of bank guarantee i.e., financial or performance
d) Applicant’s financial strength/ capacity to meet the liability/
obligation under the bank guarantee in case of invocation.
e) Past record of the applicant in respect of bank guarantees issued
earlier; e.g., instances of invocation of bank guarantees, the reasons
thereof, the customer’s response to the invocation, etc.
years. Bank guarantee beyond maturity of 10 years may be considered
against 100% cash margin with prior approval of the controlling authority.
More than ordinary care is required to be executed while issuing guarantees
on behalf of customers who enjoy credit facilities with other banks.
Unsecured guarantees, where furnished by exception, should be for a short
period & for relatively small amounts. All deferred payment guarantee
should ordinarily be secured
Appraisal of Bank Guarantee Limit
Proposals for guarantees shall be appraised with the same diligence as in the
case of fund-base limits. Branches may obtain adequate cover by way of
margin & security so as to prevent default on payments when guarantees are
invoked. Whenever an application for the issue of bank guarantee is
received, branches should examine & satisfy themselves about the following
aspects:
a) The need of the bank guarantee & whether it is related to the
applicant’s normal trade/business.
b) Whether the requirement is one time or on the regular basis
c) The nature of bank guarantee i.e., financial or performance
d) Applicant’s financial strength/ capacity to meet the liability/
obligation under the bank guarantee in case of invocation.
e) Past record of the applicant in respect of bank guarantees issued
earlier; e.g., instances of invocation of bank guarantees, the reasons
thereof, the customer’s response to the invocation, etc.
38
f) Present o/s on account of bank guarantees already issued
g) Margin
h) Collateral security offered
Format of Bank Guarantees
Bank guarantees should normally be issued on the format standardized by
Indian Banks Association (IBA). When it is required to be issued on a
format different from the IBA format, as may be demanded by some of the
beneficiary Government departments, it should be ensured that the bank
guarantee is
a) for a definite period,
b) for a definite objective enforceable on the happening of a definite
event,
c) for a specific amount
d) in respect of bona fide trade/ commercial transactions,
e) contains the Bank’s standard limitation clause
f) not stipulating any onerous clause, &
g) not containing any clause for automatic renewal of the bank guarantee
on its expiry.
f) Present o/s on account of bank guarantees already issued
g) Margin
h) Collateral security offered
Format of Bank Guarantees
Bank guarantees should normally be issued on the format standardized by
Indian Banks Association (IBA). When it is required to be issued on a
format different from the IBA format, as may be demanded by some of the
beneficiary Government departments, it should be ensured that the bank
guarantee is
a) for a definite period,
b) for a definite objective enforceable on the happening of a definite
event,
c) for a specific amount
d) in respect of bona fide trade/ commercial transactions,
e) contains the Bank’s standard limitation clause
f) not stipulating any onerous clause, &
g) not containing any clause for automatic renewal of the bank guarantee
on its expiry.
39
CREDIT APPRAISAL PROCESS
Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA,
and Properties documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC
caution list, etc.
|
Title clearance reports of the properties to be obtained from empanelled
advocates
|
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc
(on regular basis)
CREDIT APPRAISAL PROCESS
Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA,
and Properties documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC
caution list, etc.
|
Title clearance reports of the properties to be obtained from empanelled
advocates
|
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc
(on regular basis)
40
CHAPTER:-5
CREDIT RISK
ASSESSMENT
CHAPTER:-5
CREDIT RISK
ASSESSMENT
41
Credit Risk Assessment & Appraisal
An Overview Risk is inability or unwillingness of borrowercustomer or
counter -party to meet their repayment obligations/ honor their
commitments, as per the stipulated terms. Evaluates four major risks such as
Industry Risk, Business Risk, Financial Risk and Management Quality /
Risks. To arrive at the overall risk rating, the parameters are duly weighted
& calibrated to arrive at a single point indicator of risk associated with the
credit decision. Industry Risk The characteristics of an industry which pose
varying degrees of risk are built into Bank’s risk assessment model such as
competition, industry outlook, regulatory risks, contemporary issues. The
assessment of this part is external to the borrower and is done through
assessment of Industry related macro-economic parameters like demand
supply gap, capacity utilization level, financial ratios like ROCE / OPM etc.
applicable to the specific Industry and having different risk weights.
Business Risk The assessment of this factor is based on internal working of
the borrower and relates to parameters such as after sales service,
distribution set up etc. The parameters, which are only relevant to a
particular industry, are selected for scoring having different risk weights.
Financial Risk The assessment of financial risk includes appraisal of the
financial strength of the borrower based on performance & financial
indicators. The overall financial risk is assessed in terms of static ratios,
future prospects & risk mitigation (collateral security / financial standing).
The assessment of this parameter is based on internal working of the
borrower and relates to parameters such as past (not in case of a green field /
infrastructure company under implementation stage) and projected
financials. The CMA based data input sheet is uploaded into the software
Credit Risk Assessment & Appraisal
An Overview Risk is inability or unwillingness of borrowercustomer or
counter -party to meet their repayment obligations/ honor their
commitments, as per the stipulated terms. Evaluates four major risks such as
Industry Risk, Business Risk, Financial Risk and Management Quality /
Risks. To arrive at the overall risk rating, the parameters are duly weighted
& calibrated to arrive at a single point indicator of risk associated with the
credit decision. Industry Risk The characteristics of an industry which pose
varying degrees of risk are built into Bank’s risk assessment model such as
competition, industry outlook, regulatory risks, contemporary issues. The
assessment of this part is external to the borrower and is done through
assessment of Industry related macro-economic parameters like demand
supply gap, capacity utilization level, financial ratios like ROCE / OPM etc.
applicable to the specific Industry and having different risk weights.
Business Risk The assessment of this factor is based on internal working of
the borrower and relates to parameters such as after sales service,
distribution set up etc. The parameters, which are only relevant to a
particular industry, are selected for scoring having different risk weights.
Financial Risk The assessment of financial risk includes appraisal of the
financial strength of the borrower based on performance & financial
indicators. The overall financial risk is assessed in terms of static ratios,
future prospects & risk mitigation (collateral security / financial standing).
The assessment of this parameter is based on internal working of the
borrower and relates to parameters such as past (not in case of a green field /
infrastructure company under implementation stage) and projected
financials. The CMA based data input sheet is uploaded into the software
42
and the same allows computation of financial rating automatically based on
the computation of financial ratios like Net Profit Margin, Current Ratio,
DSCR, Interest Coverage etc. Management Quality The management of an
enterprise / group is rated on the parameters related to the management such
as integrity (corporate governance), track record, managerial competence /
commitment, expertise, structure & systems, experience in the industry,
credibility - ability to meet sales projections, ability to meet profit (PAT)
projections, Payment record, Strategic initiatives, Length of relationship
with the Bank and many more. Thus, internal being the factors to assess this
parameter the score would base on internal working of the Borrower’s
management and relates to parameters such as past repayment record,
quality of information submitted, group support etc. Taking above broad
parameters into account, the bank assesses the risk under three dimensions
such as obligor rating to determine investment grade and worthiness of the
customer based on the assessment of past and projected cash flows of the
borrower and it indicates probability of default (PD). It’s grading range from
PB-1 to PB-10. Facility rating evaluates the riskiness of facilities assessed
on the basis of security coverage for a given facility indicating the Loss
Given Default (LGD) and its grades range from FR-1 to FR-8. The
composite rating is the combination of PD and LGD indicating the expected
loss (EL) in case the facility defaulted which is worked out automatically by
the software based on the matrix of obligor & facility rating. The rating
grades and their description for credit risk assessment is tabulated below:-
and the same allows computation of financial rating automatically based on
the computation of financial ratios like Net Profit Margin, Current Ratio,
DSCR, Interest Coverage etc. Management Quality The management of an
enterprise / group is rated on the parameters related to the management such
as integrity (corporate governance), track record, managerial competence /
commitment, expertise, structure & systems, experience in the industry,
credibility - ability to meet sales projections, ability to meet profit (PAT)
projections, Payment record, Strategic initiatives, Length of relationship
with the Bank and many more. Thus, internal being the factors to assess this
parameter the score would base on internal working of the Borrower’s
management and relates to parameters such as past repayment record,
quality of information submitted, group support etc. Taking above broad
parameters into account, the bank assesses the risk under three dimensions
such as obligor rating to determine investment grade and worthiness of the
customer based on the assessment of past and projected cash flows of the
borrower and it indicates probability of default (PD). It’s grading range from
PB-1 to PB-10. Facility rating evaluates the riskiness of facilities assessed
on the basis of security coverage for a given facility indicating the Loss
Given Default (LGD) and its grades range from FR-1 to FR-8. The
composite rating is the combination of PD and LGD indicating the expected
loss (EL) in case the facility defaulted which is worked out automatically by
the software based on the matrix of obligor & facility rating. The rating
grades and their description for credit risk assessment is tabulated below:-
43
Obligor Rating Facility Rating Composite Rating
PB-1 Highest Safety FR-1 Highest Safety CR-1 Lowest Expected Loss
PB -2 High Safety FR-2 Higher Safety CR-2 Lower Expected Loss
PB-3 High safety FR-3 High Safety CR-3 Low Expected Loss
PB-4 Adequate Safety FR-4 Adequate Safety CR-4 Reasonable Expected Loss
PB-5
Moderate Safety FR-5 Reasonable Safety CR-5
Adequate Coverable
expected
Loss
PB-6 Moderate Safety FR-6 Moderate Safety CR-6 Moderate Expected Loss
PB-7 Inadequate Safety FR-7 Low Safety CR-7 Extra Expected Loss
PB-8 High Risk
Lowest Safety /
CR-8 High Probability of Loss
PB-9
Default Substantial
CR-9 Higher Probability of Loss
FR-8
Clean Loans /
Totally
Risk
Unsecured
PB-10
Default
CR-10 Highest Expected Loss
Note – Obligor rating from PB-1 to PB-6 are considered to be investment grade
Obligor Rating Facility Rating Composite Rating
PB-1 Highest Safety FR-1 Highest Safety CR-1 Lowest Expected Loss
PB -2 High Safety FR-2 Higher Safety CR-2 Lower Expected Loss
PB-3 High safety FR-3 High Safety CR-3 Low Expected Loss
PB-4 Adequate Safety FR-4 Adequate Safety CR-4 Reasonable Expected Loss
PB-5
Moderate Safety FR-5 Reasonable Safety CR-5
Adequate Coverable
expected
Loss
PB-6 Moderate Safety FR-6 Moderate Safety CR-6 Moderate Expected Loss
PB-7 Inadequate Safety FR-7 Low Safety CR-7 Extra Expected Loss
PB-8 High Risk
Lowest Safety /
CR-8 High Probability of Loss
PB-9
Default Substantial
CR-9 Higher Probability of Loss
FR-8
Clean Loans /
Totally
Risk
Unsecured
PB-10
Default
CR-10 Highest Expected Loss
Note – Obligor rating from PB-1 to PB-6 are considered to be investment grade
44
CHAPTER:-6
NORMS FOR
CREDIT APPRAISAL
CHAPTER:-6
NORMS FOR
CREDIT APPRAISAL
45
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed its
funding pattern & further checks the primary & collateral security cover
available for recovery of such funds.
LOAN POLICY – AN INTRODUCTION
Loan Policy is aimed at accomplishing its mission of retaining the bank’s
position as a Premier Financial Services Group, with World class standards
& significant global business, committed to excellence in customer,
shareholder & employee satisfaction & to play a leading role in the
expanding & diversifying financial services sector, while continuing
emphasis on its Development Banking role.
The Loan Policy of the any bank has successfully withstood the test of time
and with in-built flexibilities, has been able to meet the challenges in the
market place. The policy exits & operates at both formal & informal levels.
The formal policy is well documented in the form of circular instructions,
periodic guidelines & codified instructions, apart from the Book of
Instructions, where procedural aspects are highlighted.
The policy, at the holistic level, is an embodiment of the Bank’s approach to
sanctioning, managing & monitoring credit risk & aims at making the
systems & controls effective.
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed its
funding pattern & further checks the primary & collateral security cover
available for recovery of such funds.
LOAN POLICY – AN INTRODUCTION
Loan Policy is aimed at accomplishing its mission of retaining the bank’s
position as a Premier Financial Services Group, with World class standards
& significant global business, committed to excellence in customer,
shareholder & employee satisfaction & to play a leading role in the
expanding & diversifying financial services sector, while continuing
emphasis on its Development Banking role.
The Loan Policy of the any bank has successfully withstood the test of time
and with in-built flexibilities, has been able to meet the challenges in the
market place. The policy exits & operates at both formal & informal levels.
The formal policy is well documented in the form of circular instructions,
periodic guidelines & codified instructions, apart from the Book of
Instructions, where procedural aspects are highlighted.
The policy, at the holistic level, is an embodiment of the Bank’s approach to
sanctioning, managing & monitoring credit risk & aims at making the
systems & controls effective.
46
The Loan Policy also aims at striking a balance between underwriting assets
of high quality, and customer oriented selling. The objective is to maintain
Bank’s undisputed leadership in the Indian Banking scene.
The Policy aims at continued growth of assets while endeavoring to ensure
that these remain performing & standard. To this end, as a matter of policy
the Bank does not take over any Non-Performing Asset (NPA) from other
banks.
The Central Board of the Bank is the apex authority in formulating all
matters of policy in the bank. The Board has permitted setting up of the
Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of
the Bank of which the Top Management are members, to deal with issues
relating to credit policy & procedures on a Bank-wide basis. The CPPC sets
broad policies for managing credit risk including industrial rehabilitation,
sets parameters for credit portfolio in terms of exposure limits, reviews
credit appraisal systems, approves policies for compromises, write offs, etc.
& general management of NPAs besides dealing with the issues relating to
Delegation of Powers.
The Loan Policy also aims at striking a balance between underwriting assets
of high quality, and customer oriented selling. The objective is to maintain
Bank’s undisputed leadership in the Indian Banking scene.
The Policy aims at continued growth of assets while endeavoring to ensure
that these remain performing & standard. To this end, as a matter of policy
the Bank does not take over any Non-Performing Asset (NPA) from other
banks.
The Central Board of the Bank is the apex authority in formulating all
matters of policy in the bank. The Board has permitted setting up of the
Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of
the Bank of which the Top Management are members, to deal with issues
relating to credit policy & procedures on a Bank-wide basis. The CPPC sets
broad policies for managing credit risk including industrial rehabilitation,
sets parameters for credit portfolio in terms of exposure limits, reviews
credit appraisal systems, approves policies for compromises, write offs, etc.
& general management of NPAs besides dealing with the issues relating to
Delegation of Powers.
47
Based on the present indications, following exposure levels are
prescribed:
Individuals as borrowers
Maximum aggregate credit facilities of
Rs. 20 crores
( Fund based & non-fund based )
Non-corporates
( e.g. Partnerships, JHF, Associations )
Maximum aggregate credit facilities of
Rs. 80 crores
( Fund based & non-fund based )
Corporates Maximum aggregate credit facilities as
per prudential norms of RBI on
exposures
REQUIREMENT OF DOCUMENTS FOR PROCESS OF LOAN
1. Application for requirement of loan
2. Copy of Memorandum & Article of Association
3. Copy of incorporation of business
4. Copy of commencement of business
5. Copy of resolution regarding the requirement of credit facilities
6. Brief history of company, its customers & supplies, previous track
records, orders in hand. Also provide some information about the
directors of the company
Based on the present indications, following exposure levels are
prescribed:
Individuals as borrowers
Maximum aggregate credit facilities of
Rs. 20 crores
( Fund based & non-fund based )
Non-corporates
( e.g. Partnerships, JHF, Associations )
Maximum aggregate credit facilities of
Rs. 80 crores
( Fund based & non-fund based )
Corporates Maximum aggregate credit facilities as
per prudential norms of RBI on
exposures
REQUIREMENT OF DOCUMENTS FOR PROCESS OF LOAN
1. Application for requirement of loan
2. Copy of Memorandum & Article of Association
3. Copy of incorporation of business
4. Copy of commencement of business
5. Copy of resolution regarding the requirement of credit facilities
6. Brief history of company, its customers & supplies, previous track
records, orders in hand. Also provide some information about the
directors of the company
48
7. Financial statements of last 3 years including the provisional financial
statement for the year 2007-08
8. Copy of PAN/TAN number of company
9. Copy of last Electricity bill of company
10. Copy of GST/CST number
11. Copy of Excise number
12. Photo I.D. of all the directors
13. Address proof of all the directors
14. Copies related to the property such as 7/12 & 8A utara, lease/ sales
deed, 2R permission, Allotment letter, Possession
15. Bio-data form of all the directors duly filled & notarized
16. Financial statements of associate concern for the last 3 years
7. Financial statements of last 3 years including the provisional financial
statement for the year 2007-08
8. Copy of PAN/TAN number of company
9. Copy of last Electricity bill of company
10. Copy of GST/CST number
11. Copy of Excise number
12. Photo I.D. of all the directors
13. Address proof of all the directors
14. Copies related to the property such as 7/12 & 8A utara, lease/ sales
deed, 2R permission, Allotment letter, Possession
15. Bio-data form of all the directors duly filled & notarized
16. Financial statements of associate concern for the last 3 years
49
CHAPTER:-7
CASE STUDY
CHAPTER:-7
CASE STUDY
50
1.Details of case study
Company:- Janak Transport Co.
Firm:- Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari;
* Shri Jesangbhai Lavjibhai Chaudhari;
* Shri Vinodkumar Lavjibhai Chaudhari;
* Shri Pratapbhai Lavjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari
Industry:- Transport Activity
Segment:- C& I
Date of Incorporation:- 03.09.82
Banking with SBI since:- 16 years as a current A/C holder
Banking arrangement:- Multiple Banking Arrangement
Regd. & Admin. Office:- Opp. Simandhar Flat,
Nr. Pashabhai Petrol Pump,
Highway, Mehsana.
Janak Transport Co. is a partnership firm established in 1982 for carrying a
transport business.
As the company is in this business since incorporation & the unit has good
contracts with ONGC since last 26 years so it has a good repo with ONGC.
As the company has a good repo with ONGC, the ONGC outlook of the
business is considered positive.
The firm has approached for term loan of Rs. 295 lacs to finance the
purchase of Mahindra-Bolero. The total project cost is estimated to be Rs.
363.44 lacs.
1.Details of case study
Company:- Janak Transport Co.
Firm:- Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari;
* Shri Jesangbhai Lavjibhai Chaudhari;
* Shri Vinodkumar Lavjibhai Chaudhari;
* Shri Pratapbhai Lavjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari
Industry:- Transport Activity
Segment:- C& I
Date of Incorporation:- 03.09.82
Banking with SBI since:- 16 years as a current A/C holder
Banking arrangement:- Multiple Banking Arrangement
Regd. & Admin. Office:- Opp. Simandhar Flat,
Nr. Pashabhai Petrol Pump,
Highway, Mehsana.
Janak Transport Co. is a partnership firm established in 1982 for carrying a
transport business.
As the company is in this business since incorporation & the unit has good
contracts with ONGC since last 26 years so it has a good repo with ONGC.
As the company has a good repo with ONGC, the ONGC outlook of the
business is considered positive.
The firm has approached for term loan of Rs. 295 lacs to finance the
purchase of Mahindra-Bolero. The total project cost is estimated to be Rs.
363.44 lacs.
51
Brief of Contract:
(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with fixed 3000 Km run/ month & 12 hours duty/ day)
(2). Additional/ km charges beyond 3000 km. Rs. 3.57
(3). Duration of contract = 3 Years
Proposed Credit Requirement:
Fund Based = Rs. 295 lacs
Performance Details
a) PERFORMANCE AND FINANCIAL INDICATORS:
(Rs. In laks)
Aud. Aud. Esti. Proj. Proj. Proj. Proj.
31
st
March 2007 2008 2009 2010 2011 2012 2013
Net Sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65
Operating Profit
(after interest) 149.64 182.92 234.24 326.69 374.32 404.08 425.06
PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
PBT/Sales (%) 0.24 0.53 3.15 10.31 13.96 15.97 16.91
PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Cash Accruals 39.05 40.51 129.25 233.74 224.25 212.66 200.36
PBDIT 54.44 52.41 150.01 266.99 247.21 226.20 203.72
Paid up Capital 21.04 22.56 91.00 113.48 181.10 256.57 340.08
TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Adjusted TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
TOL/Adjusted
TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47
Current Ratio (Excl.
2.34 1.97 3.93 4.49 5.66 5.83 6.47
Brief of Contract:
(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with fixed 3000 Km run/ month & 12 hours duty/ day)
(2). Additional/ km charges beyond 3000 km. Rs. 3.57
(3). Duration of contract = 3 Years
Proposed Credit Requirement:
Fund Based = Rs. 295 lacs
Performance Details
a) PERFORMANCE AND FINANCIAL INDICATORS:
(Rs. In laks)
Aud. Aud. Esti. Proj. Proj. Proj. Proj.
31
st
March 2007 2008 2009 2010 2011 2012 2013
Net Sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65
Operating Profit
(after interest) 149.64 182.92 234.24 326.69 374.32 404.08 425.06
PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
PBT/Sales (%) 0.24 0.53 3.15 10.31 13.96 15.97 16.91
PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Cash Accruals 39.05 40.51 129.25 233.74 224.25 212.66 200.36
PBDIT 54.44 52.41 150.01 266.99 247.21 226.20 203.72
Paid up Capital 21.04 22.56 91.00 113.48 181.10 256.57 340.08
TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Adjusted TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
TOL/Adjusted
TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47
Current Ratio (Excl.
2.34 1.97 3.93 4.49 5.66 5.83 6.47
52
TL instalments)
NWC 100.20 103.87 386.14 349.18 323.80 361.29 438.25
b) Synopsis of Balance Sheet :
Sources of funds 31.03.2007 31.03.2008
Share Capital 21.04 22.56
Reserves and Surplus
Secured Loans : short term 2.57 14.66
: long term 102.87 100.10
Unsecured Loans 39.92 36.21
Deferred Tax Liability
Total 166.40 173.53
Application of Funds
Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments 52.48 39.3
Inventories (Movable Assets) 110.59 134.66
Sundry debtors 92.61 78.70
Cash & bank balances 11.93 48.15
Loans & advances to
subsidiaries and group companies
Loans & advances to others 10.58 10.49
( Less : Current liabilities ) 109.22 136.74
(Less : Provisions ) 2.57 1.03
Net Current Assets 113.92 134.23
Misc. Expenditure
(To the extent not written off or
adjusted )
Total 166.40 173.53
c) Movement in TNW (Rs. in lacs)
2007 2008 2009 2010 2011 2012 2013
Opening TNW 17.63 21.04 22.56 113.48 181.10 256.57 340.08
TL instalments)
NWC 100.20 103.87 386.14 349.18 323.80 361.29 438.25
b) Synopsis of Balance Sheet :
Sources of funds 31.03.2007 31.03.2008
Share Capital 21.04 22.56
Reserves and Surplus
Secured Loans : short term 2.57 14.66
: long term 102.87 100.10
Unsecured Loans 39.92 36.21
Deferred Tax Liability
Total 166.40 173.53
Application of Funds
Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments 52.48 39.3
Inventories (Movable Assets) 110.59 134.66
Sundry debtors 92.61 78.70
Cash & bank balances 11.93 48.15
Loans & advances to
subsidiaries and group companies
Loans & advances to others 10.58 10.49
( Less : Current liabilities ) 109.22 136.74
(Less : Provisions ) 2.57 1.03
Net Current Assets 113.92 134.23
Misc. Expenditure
(To the extent not written off or
adjusted )
Total 166.40 173.53
c) Movement in TNW (Rs. in lacs)
2007 2008 2009 2010 2011 2012 2013
Opening TNW 17.63 21.04 22.56 113.48 181.10 256.57 340.08
53
Add PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Add. Increase in
equity / premium
8.42 10.17 68.44
Add./Subtract
change in intangible
assets
Adjust prior year
expenses
Deduct Dividend
Payment
/Withdrawals
6.21 11.55 25.00 50.00 60.00 65.00
Closing TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Appraisal Memorandum for term loan:
Circle: Ahmedabad
Branch: Mehsana
Company: Janak Transport Company(JTC)
Term Loan :
a) Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus
Scheme.
b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up
arrangement with ONGC.
c) Appraised by: Inhouse examined by the Branch and found to be
economically viable
d) Cost of Project & Means of finance:
Cost Means
MAHINDRA Bolero DI-2WD 328.63 Equity :
68.44
Insurance 15.34
RTO Tax 19.47
WC Margin Debt: 295.00
Add PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Add. Increase in
equity / premium
8.42 10.17 68.44
Add./Subtract
change in intangible
assets
Adjust prior year
expenses
Deduct Dividend
Payment
/Withdrawals
6.21 11.55 25.00 50.00 60.00 65.00
Closing TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Appraisal Memorandum for term loan:
Circle: Ahmedabad
Branch: Mehsana
Company: Janak Transport Company(JTC)
Term Loan :
a) Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus
Scheme.
b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up
arrangement with ONGC.
c) Appraised by: Inhouse examined by the Branch and found to be
economically viable
d) Cost of Project & Means of finance:
Cost Means
MAHINDRA Bolero DI-2WD 328.63 Equity :
68.44
Insurance 15.34
RTO Tax 19.47
WC Margin Debt: 295.00
54
Total 363.44 Total 363.44
e) Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs. 6.16 lacs as per details given below:
Basic Price: Rs. 5.57 lacs
RTO : Rs. 0.33 lacs
Insurance : Rs. 0.26 lacs
The cost mentioned above is as per the quotation submitted by
Shrijee Motors, Mehsana.
The firm is required to purchase 59 Mahindra Bolero for this
purpose. Total cost of vehicle including the insurance and R.T.O. is
Rs.363.44 lacs.
The project is proposed to be financed by way of medium term loan
of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a
margin.
Break-even and sensitivity analysis and whether acceptable:
Break even analysis 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13
Net Sales (A) 713.82 898.65 898.65 898.65 898.65
Variable costs
Power and Fuel 223.76 253.68 253.68 253.68 253.68
Other operating Exp. 44.89 47.39 48.89 50.89 55.98
Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66
Fixed Costs
Direct Labour 72.40 85.52 87.52 90.72 94.07
Selling, Admin. & General
Expenses 8.50 9.50 10.50 11.50 12.50
Interest Expenses 20.76 33.25 22.96 13.54 3.36
Depreciation 106.77 141.12 98.78 69.15 48.40
Total 363.44 Total 363.44
e) Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs. 6.16 lacs as per details given below:
Basic Price: Rs. 5.57 lacs
RTO : Rs. 0.33 lacs
Insurance : Rs. 0.26 lacs
The cost mentioned above is as per the quotation submitted by
Shrijee Motors, Mehsana.
The firm is required to purchase 59 Mahindra Bolero for this
purpose. Total cost of vehicle including the insurance and R.T.O. is
Rs.363.44 lacs.
The project is proposed to be financed by way of medium term loan
of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a
margin.
Break-even and sensitivity analysis and whether acceptable:
Break even analysis 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13
Net Sales (A) 713.82 898.65 898.65 898.65 898.65
Variable costs
Power and Fuel 223.76 253.68 253.68 253.68 253.68
Other operating Exp. 44.89 47.39 48.89 50.89 55.98
Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66
Fixed Costs
Direct Labour 72.40 85.52 87.52 90.72 94.07
Selling, Admin. & General
Expenses 8.50 9.50 10.50 11.50 12.50
Interest Expenses 20.76 33.25 22.96 13.54 3.36
Depreciation 106.77 141.12 98.78 69.15 48.40
55
Commercial viability:
Year ending 31
st
March 2009 2010 2011 2012 2013 Total
Capacity utilisation % 100% 100% 100% 100% 100%
Sales
713.82 898.65 898.65 898.65 898.65
Net Profit
22.48 92.62 125.47 143.51 151.96
536.04
Depreciation
106.77 141.12 98.78 69.15 48.40
464.22
Cash Accruals 129.25 233.74 224.25 212.66 200.36
1000.26
Interest
20.76 33.25 22.96 13.54 3.36
93.87
TOTAL
150.01 266.99 247.21 226.20 203.72
1094.13
TL / DPG repayments
83.75 132.92 94.58 93.85 43.02
448.12
Interest
20.76 33.25 22.96 13.54 3.36
93.87
TOTAL
104.51 166.17 117.54 107.39 46.38
541.99
Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33
Contribution (D=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (E=D/A) 0.62 0.66 0.66 0.66 0.66
BE sales (F=C/E) 336.18 408.17 332.97 280.17 239.89
BE sales as % of Net Sales 47.10 45.42 37.05 31.18 26.69
Fixed cost with out
depriciation G 101.66 128.27 120.98 115.76 109.93
Contribution (H=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (I=D/A) 0.62 0.66 0.66 0.66 0.66
Cash BE sales (J=G/I) 163.97 194.35 183.30 175.39 166.56
CASHBE sales as % of Net
Sales 22.97 21.63 20.40 19.52 18.53
Commercial viability:
Year ending 31
st
March 2009 2010 2011 2012 2013 Total
Capacity utilisation % 100% 100% 100% 100% 100%
Sales
713.82 898.65 898.65 898.65 898.65
Net Profit
22.48 92.62 125.47 143.51 151.96
536.04
Depreciation
106.77 141.12 98.78 69.15 48.40
464.22
Cash Accruals 129.25 233.74 224.25 212.66 200.36
1000.26
Interest
20.76 33.25 22.96 13.54 3.36
93.87
TOTAL
150.01 266.99 247.21 226.20 203.72
1094.13
TL / DPG repayments
83.75 132.92 94.58 93.85 43.02
448.12
Interest
20.76 33.25 22.96 13.54 3.36
93.87
TOTAL
104.51 166.17 117.54 107.39 46.38
541.99
Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33
Contribution (D=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (E=D/A) 0.62 0.66 0.66 0.66 0.66
BE sales (F=C/E) 336.18 408.17 332.97 280.17 239.89
BE sales as % of Net Sales 47.10 45.42 37.05 31.18 26.69
Fixed cost with out
depriciation G 101.66 128.27 120.98 115.76 109.93
Contribution (H=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (I=D/A) 0.62 0.66 0.66 0.66 0.66
Cash BE sales (J=G/I) 163.97 194.35 183.30 175.39 166.56
CASHBE sales as % of Net
Sales 22.97 21.63 20.40 19.52 18.53
56
Gross DSCR
1.44 1.61 2.10 2.11 4.39
Net DSCR
1.54 1.76 2.37 2.27 4.66
Average Gross DSCR 2.02
Average Net DSCR 2.23
Deviations in Loan Policy/ Scheme:
Parameters Indicative
Min/Max level as
per Scheme
Company's level as on
31/03/2008
Liquidity Min. 1.33 1.42
TOL/TNW Max. 3.00 12.80*
Average gross DSCR (TL) Min. 2.00 2.002
Promoters contribution (under
tie-up)
Min. 10 % 18.86%
profits in the last two Min. Rs.3.00 lacs
with rising trend
Actual profit Rs. 1.20
lacs for year 2006-07 and
Rs.2.90 lacs for year 2007-
08*
Others Nil Nil
RATE OF INTEREST:
As applicable to “Transport Plus Scheme”. At present 14.00 % (0.25%
above SBAR-presently 13.75% wef 12/08/2008) with monthly rests. This is
subject to change as per Bank’s Instruction.
Analysis:-
Janak Transport Company is an existing profit making unit
The main chunk behind giving loan is that Janak Transport Company
is doing contract with ONGC since incorporation
Gross DSCR
1.44 1.61 2.10 2.11 4.39
Net DSCR
1.54 1.76 2.37 2.27 4.66
Average Gross DSCR 2.02
Average Net DSCR 2.23
Deviations in Loan Policy/ Scheme:
Parameters Indicative
Min/Max level as
per Scheme
Company's level as on
31/03/2008
Liquidity Min. 1.33 1.42
TOL/TNW Max. 3.00 12.80*
Average gross DSCR (TL) Min. 2.00 2.002
Promoters contribution (under
tie-up)
Min. 10 % 18.86%
profits in the last two Min. Rs.3.00 lacs
with rising trend
Actual profit Rs. 1.20
lacs for year 2006-07 and
Rs.2.90 lacs for year 2007-
08*
Others Nil Nil
RATE OF INTEREST:
As applicable to “Transport Plus Scheme”. At present 14.00 % (0.25%
above SBAR-presently 13.75% wef 12/08/2008) with monthly rests. This is
subject to change as per Bank’s Instruction.
Analysis:-
Janak Transport Company is an existing profit making unit
The main chunk behind giving loan is that Janak Transport Company
is doing contract with ONGC since incorporation
57
The promoters are having considerable experience as transport
contractor with ONGC
The unit has got confirm order/ tie-up with ONGC
A letter of authority from ONGC was received, that if Janak Transport
Company will not make the payment than ONGC will directly make
the payment to the bank
The promoters contribution to the project is 18.86% which is above
the margin requirement
The current ratio is 1.42 that is satisfactory
Profits in the last two years:-
o Min. Rs. 3 lacs with rising trend
o Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for
the 2007-08
o If the partners remuneration & interest is included, the profit for
the year ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21
lacs
TOL/TNW should be max. 3 which is 12.80 here, as the co. has done
multiple banking arrangement it has o/s loans with other banks also
but the co. is regularly making the payment of loans of principal
amount along with the interest so the loan is given.
Also the contract awarded is backed by guarantee from ONGC
regarding direct payment of monthly bills to SBI. Hence, surety of
repayment is assured.
The bank also checks commercial viability of the company & found
that the DSCR for term loan is 2.02 which is considered satisfactory
The promoters are having considerable experience as transport
contractor with ONGC
The unit has got confirm order/ tie-up with ONGC
A letter of authority from ONGC was received, that if Janak Transport
Company will not make the payment than ONGC will directly make
the payment to the bank
The promoters contribution to the project is 18.86% which is above
the margin requirement
The current ratio is 1.42 that is satisfactory
Profits in the last two years:-
o Min. Rs. 3 lacs with rising trend
o Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for
the 2007-08
o If the partners remuneration & interest is included, the profit for
the year ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21
lacs
TOL/TNW should be max. 3 which is 12.80 here, as the co. has done
multiple banking arrangement it has o/s loans with other banks also
but the co. is regularly making the payment of loans of principal
amount along with the interest so the loan is given.
Also the contract awarded is backed by guarantee from ONGC
regarding direct payment of monthly bills to SBI. Hence, surety of
repayment is assured.
The bank also checks commercial viability of the company & found
that the DSCR for term loan is 2.02 which is considered satisfactory
58
Despite that the bank has also done B.E. analysis & found that the
B.E. sales was 47.10% of net sales for this current year
The net sales & PAT of the company is increasing year after year so
overall profitability is good
The overall projected performance & financial of the unit are
considered satisfactory
Despite that the bank has also done B.E. analysis & found that the
B.E. sales was 47.10% of net sales for this current year
The net sales & PAT of the company is increasing year after year so
overall profitability is good
The overall projected performance & financial of the unit are
considered satisfactory
59
(2). Details of case study
Company:- Akshat Polymers
Firm:- Partnership Firm (M/S Umiya Polymers)
* Shri Amrutbhai Laljibhai Desai
* Shri Gunvantbhai Ambaramdas Patel
* Shri Natvarlal Mohanlal Patel
* Shri Dharamsinhbhai Lallubhai Desai
* Shri Kanjibhai Maljibhai Desai
Industry:- Manufacturing
Activity:- Maufacturing of HDPP woven sacks
Segment:- SSI
Date of Incorporation:- 19.11.07
Banking arrangement:- Sole Banking
Regd. & Admin. Office:- RS No. 840,
Kadi Thol Road,
Tal-Kadi, Dist-Mehsana
The unit will have installed capacity of 2520 MT. The unit is expected to
start commercial production from first week of September, 2008. The
capacity utilization for the year 2008-09 has been projected at 70% of
installed capacity in terms of the utilization of the machines. Accordingly
the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09
in the first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during
the year 2009-10 (the first full year of operations) and accordingly the sale
(2). Details of case study
Company:- Akshat Polymers
Firm:- Partnership Firm (M/S Umiya Polymers)
* Shri Amrutbhai Laljibhai Desai
* Shri Gunvantbhai Ambaramdas Patel
* Shri Natvarlal Mohanlal Patel
* Shri Dharamsinhbhai Lallubhai Desai
* Shri Kanjibhai Maljibhai Desai
Industry:- Manufacturing
Activity:- Maufacturing of HDPP woven sacks
Segment:- SSI
Date of Incorporation:- 19.11.07
Banking arrangement:- Sole Banking
Regd. & Admin. Office:- RS No. 840,
Kadi Thol Road,
Tal-Kadi, Dist-Mehsana
The unit will have installed capacity of 2520 MT. The unit is expected to
start commercial production from first week of September, 2008. The
capacity utilization for the year 2008-09 has been projected at 70% of
installed capacity in terms of the utilization of the machines. Accordingly
the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09
in the first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during
the year 2009-10 (the first full year of operations) and accordingly the sale
60
for the year is projected at Rs.19.77 crores. The projections are considered
acceptable in view of the following factors:
i) The unit plans to initially market its product in Gujarat,
Maharastra, Rajasthan and sale to Central Govt. who purchases the
HDPP woven sacks for grains through open tenders. The unit has
started negotiating for booking of the orders for the proposed plant
and results are promising as advised.
ii) HDPP woven sacks are widely used as packaging material in
Cement, Fertiliser, storage of the AGL commodities. All these
segments are reported to have good demand for the HDPP/PE
woven sacks in the Indian market.
iii) As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
iv) The promoters have sufficient experience in the line of activity.
The promoters had already made negotiations of the some of the
industries as detailed under for selling the HDPP woven sacks:
Indian Farmers Fertilizers Company Limited
Gujaco masol
Birala cement
Sanghi Cement
Ambuja cement
Various grain & Food Export units of Gujarat, etc.
v) The firm has also started marketing activity for their products by
making personnel contacts & writing introductory letters to
potential customers & as the promoters are in the same line of
for the year is projected at Rs.19.77 crores. The projections are considered
acceptable in view of the following factors:
i) The unit plans to initially market its product in Gujarat,
Maharastra, Rajasthan and sale to Central Govt. who purchases the
HDPP woven sacks for grains through open tenders. The unit has
started negotiating for booking of the orders for the proposed plant
and results are promising as advised.
ii) HDPP woven sacks are widely used as packaging material in
Cement, Fertiliser, storage of the AGL commodities. All these
segments are reported to have good demand for the HDPP/PE
woven sacks in the Indian market.
iii) As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
iv) The promoters have sufficient experience in the line of activity.
The promoters had already made negotiations of the some of the
industries as detailed under for selling the HDPP woven sacks:
Indian Farmers Fertilizers Company Limited
Gujaco masol
Birala cement
Sanghi Cement
Ambuja cement
Various grain & Food Export units of Gujarat, etc.
v) The firm has also started marketing activity for their products by
making personnel contacts & writing introductory letters to
potential customers & as the promoters are in the same line of
61
business activity for the last 15 years they are having very good
market contacts for the sales of the Finished Goods.
vi) The orders worth Rs.2.50 crores is expected to be finalized by end
of Agust, 2008 and before commissioning of the plant as advised.
vii) Proposal:
Sanction for;
i) FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum
@13.75and for TL 1.50% above SBAR minimum @14.25%
Performance & Financial Indicators: (Rs. in Crores)
Year 2009 2010 2011 2012 2013 2014
Installed cap Qty.
(MT/pa.)
2520
2520 2520 2520 2520 2520
Net Sales Qty.
(approx) (MT) 1029 2016 2091 2142 2217 2268
Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34
(Export) 0.00 0.00 0.00 0.00 0.00 0.00
Operating profit 0.44 1.18 1.19 1.23 1.31 1.33
Profit before tax
0.43 1.17 1.18 1.22 1.30 1.32
PBT/Net sales (%)
4.64 5.92 5.73 5.78 5.96 5.91
Profit after tax
0.29 0.78 0.79 0.82 0.87 0.88
Cash accruals
0.66 1.10 1.09 1.15 1.24 1.32
PBDIT
1.20 2.04 1.96 1.97 2.02 2.05
Paid up capital
0.95 0.95 0.95 0.95 0.95 0.95
Tangible net worth
1.23 2.01 2.80 3.62 4.49 5.38
Adjusted TNW
1.73 2.51 3.30 4.12 4.99 5.88
TOL/TNW
4.11 2.50 1.67 1.19 0.88 0.66
TOL/Adjusted TNW
2.64 1.80 1.27 0.92 0.81 0.62
business activity for the last 15 years they are having very good
market contacts for the sales of the Finished Goods.
vi) The orders worth Rs.2.50 crores is expected to be finalized by end
of Agust, 2008 and before commissioning of the plant as advised.
vii) Proposal:
Sanction for;
i) FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum
@13.75and for TL 1.50% above SBAR minimum @14.25%
Performance & Financial Indicators: (Rs. in Crores)
Year 2009 2010 2011 2012 2013 2014
Installed cap Qty.
(MT/pa.)
2520
2520 2520 2520 2520 2520
Net Sales Qty.
(approx) (MT) 1029 2016 2091 2142 2217 2268
Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34
(Export) 0.00 0.00 0.00 0.00 0.00 0.00
Operating profit 0.44 1.18 1.19 1.23 1.31 1.33
Profit before tax
0.43 1.17 1.18 1.22 1.30 1.32
PBT/Net sales (%)
4.64 5.92 5.73 5.78 5.96 5.91
Profit after tax
0.29 0.78 0.79 0.82 0.87 0.88
Cash accruals
0.66 1.10 1.09 1.15 1.24 1.32
PBDIT
1.20 2.04 1.96 1.97 2.02 2.05
Paid up capital
0.95 0.95 0.95 0.95 0.95 0.95
Tangible net worth
1.23 2.01 2.80 3.62 4.49 5.38
Adjusted TNW
1.73 2.51 3.30 4.12 4.99 5.88
TOL/TNW
4.11 2.50 1.67 1.19 0.88 0.66
TOL/Adjusted TNW
2.64 1.80 1.27 0.92 0.81 0.62
62
Current ratio
1.34 1.52 1.53 1.53 1.57 1.81
NWC 1.01 1.71 2.40 2.57 2.74 3.28
Balance Sheet: (Rs. In crores)
Sources of funds 31.03.2009 31.03.2010
Share Capital 0.95 0.95
Reserves and Surplus 0.29 1.07
Secured Loans : short term CC 2.25 2.25
: long term TL 2.00 1.60
Unsecured Loans 0.50 0.50
Deferred Tax Liability
Total 5.99 6.37
Application of Funds
Fixed Assets (Gross Block) 2.67 2.67
Less Depreciation 0.37 0.69
Net Block 2.30 1.98
Capital Work in Progress
Investments
Inventories 1.73 2.13
Sundry debtors 1.85 2.40
Cash & bank balances 0.15 0.15
Loans & advances to suppliers of
Raw material / spares
0.14 0.12
Advance tax 0.10 0.23
( Less : Current liabilities ) 0.31 0.67
(Less : Provisions )
Net Current Assets 3.66 4.36
Misc. Expenditure
(To the extent not written off or adjusted
)
Non-Current Assets/ Deposits 0.03 0.03
Total 5.99 6.37
Current ratio
1.34 1.52 1.53 1.53 1.57 1.81
NWC 1.01 1.71 2.40 2.57 2.74 3.28
Balance Sheet: (Rs. In crores)
Sources of funds 31.03.2009 31.03.2010
Share Capital 0.95 0.95
Reserves and Surplus 0.29 1.07
Secured Loans : short term CC 2.25 2.25
: long term TL 2.00 1.60
Unsecured Loans 0.50 0.50
Deferred Tax Liability
Total 5.99 6.37
Application of Funds
Fixed Assets (Gross Block) 2.67 2.67
Less Depreciation 0.37 0.69
Net Block 2.30 1.98
Capital Work in Progress
Investments
Inventories 1.73 2.13
Sundry debtors 1.85 2.40
Cash & bank balances 0.15 0.15
Loans & advances to suppliers of
Raw material / spares
0.14 0.12
Advance tax 0.10 0.23
( Less : Current liabilities ) 0.31 0.67
(Less : Provisions )
Net Current Assets 3.66 4.36
Misc. Expenditure
(To the extent not written off or adjusted
)
Non-Current Assets/ Deposits 0.03 0.03
Total 5.99 6.37
63
Movement in TNW:-
Movement in TNW Projected
31.03.2009 31.03.2010 31.03.2011
Opening TNW 0.00 1.23 2.01
+ PAT 0.29 0.78 0.79
+ Inc. in Equity / Premium 0.95
+/- Change in Int. Assets -0.01
+/- Adj. of prior year exp.
- Dividend payment
Closing in TNW 1.23 2.01 2.80
Bank Income Analysis (Rs. in crores)
From Projection
31.03.2009
Projection
31.03.2010
WC Int. 0.16 0.27
TL Int. 0.14 0.29
LC - -
BG - -
Bill - -
Others loan processing 0.03 0.01
Total 0.33 0.57
Deviations in Loan Policy:
Parameters Indicative Min/Max
level
as per loan policy
Company's
level as on
31.03.2009
@
Company's level
as on 31.03.2010
Liquidity 1.33 1.34 1.52
TOL/TNW
TOL/Adj. TNW
3.00 4.11
2.64
2.50
1.80
Average gross DSCR
(TL)
1.75 2.54 2.54
Debt / equity
Debt/Quasi equity
2:1 2.01:1
1.15:1
1.03:1
0.64:1
Any others - - -
Movement in TNW:-
Movement in TNW Projected
31.03.2009 31.03.2010 31.03.2011
Opening TNW 0.00 1.23 2.01
+ PAT 0.29 0.78 0.79
+ Inc. in Equity / Premium 0.95
+/- Change in Int. Assets -0.01
+/- Adj. of prior year exp.
- Dividend payment
Closing in TNW 1.23 2.01 2.80
Bank Income Analysis (Rs. in crores)
From Projection
31.03.2009
Projection
31.03.2010
WC Int. 0.16 0.27
TL Int. 0.14 0.29
LC - -
BG - -
Bill - -
Others loan processing 0.03 0.01
Total 0.33 0.57
Deviations in Loan Policy:
Parameters Indicative Min/Max
level
as per loan policy
Company's
level as on
31.03.2009
@
Company's level
as on 31.03.2010
Liquidity 1.33 1.34 1.52
TOL/TNW
TOL/Adj. TNW
3.00 4.11
2.64
2.50
1.80
Average gross DSCR
(TL)
1.75 2.54 2.54
Debt / equity
Debt/Quasi equity
2:1 2.01:1
1.15:1
1.03:1
0.64:1
Any others - - -
64
Break-even and sensitivity analysis and whether acceptable:(Rs. in
crores)
Break even analysis 31/03/09
31-Mar-
10
31-Mar-
11
30-Mar-
12
31-Mar-
13
31-Mar-
14
Capacity Utilization 70% 80% 83% 85% 88% 90%
Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34
Variable costs
Raw material 8.74 17.13 17.77 18.20 18.84 19.27
Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00
Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59
Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18
Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04
Total Variable
Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00
Fixed Costs
Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17
Selling, Admin. &
General Expenses 0.06 0.10 0.11 0.12 0.13 0.14
Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29
Depreciation 0.37 0.32 0.30 0.33 0.37 0.44
Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04
Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34
Contribution ratio
(E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10
Year ending
31
st
March
2008-
09
2010-11 2011-12 2012-13 2013-14 Total
Net Sales 9.26 20.58 21.09 21.82 22.34
Net Profit 0.29 0.79 0.82 0.87 0.88
Cash Accruals 0.66 1.09 1.15 1.24 1.32 6.56
Interest on
TLs
0.16 0.22 0.16 0.11 0.05 0.97
Sub Total
(A)
0.82 1.31 1.31 1.35 1.37 7.53
Total
repayment
0.00 0.40 0.40 0.40 0.40 2.00
Interest on TL 0.16 0.22 0.16 0.11 0.05 0.97
Sub Total (B) 0.16 0.62 0.56 0.51 0.45 2.97
DSCR (Gross) 5.13 2.11 2.34 2.65 3.04
Net DSCR - 2.73 2.88 3.10 3.30
Average
Gross DSCR
2.54
Average Net
DSCR
3.28
Break-even and sensitivity analysis and whether acceptable:(Rs. in
crores)
Break even analysis 31/03/09
31-Mar-
10
31-Mar-
11
30-Mar-
12
31-Mar-
13
31-Mar-
14
Capacity Utilization 70% 80% 83% 85% 88% 90%
Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34
Variable costs
Raw material 8.74 17.13 17.77 18.20 18.84 19.27
Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00
Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59
Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18
Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04
Total Variable
Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00
Fixed Costs
Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17
Selling, Admin. &
General Expenses 0.06 0.10 0.11 0.12 0.13 0.14
Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29
Depreciation 0.37 0.32 0.30 0.33 0.37 0.44
Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04
Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34
Contribution ratio
(E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10
Year ending
31
st
March
2008-
09
2010-11 2011-12 2012-13 2013-14 Total
Net Sales 9.26 20.58 21.09 21.82 22.34
Net Profit 0.29 0.79 0.82 0.87 0.88
Cash Accruals 0.66 1.09 1.15 1.24 1.32 6.56
Interest on
TLs
0.16 0.22 0.16 0.11 0.05 0.97
Sub Total
(A)
0.82 1.31 1.31 1.35 1.37 7.53
Total
repayment
0.00 0.40 0.40 0.40 0.40 2.00
Interest on TL 0.16 0.22 0.16 0.11 0.05 0.97
Sub Total (B) 0.16 0.62 0.56 0.51 0.45 2.97
DSCR (Gross) 5.13 2.11 2.34 2.65 3.04
Net DSCR - 2.73 2.88 3.10 3.30
Average
Gross DSCR
2.54
Average Net
DSCR
3.28
65
BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40
BE sales as % of Net
Sales 98.27 46.38 45.48 43.95 46.29 46.55
Interfirm Comparison: (To be given only where data from comparable units is
available.)
(Amt in Cr)
Name of Company FBL NFBL Year Sales PBT /
Sales
%
TOL /
TNW
CR
Ahmedabad Packaging
Industries Ltd.
3.30 1.20 2007 23.11 2.16 1.47 1.16
Singhal Industries Pvt.
Ltd
6.70 -- 2010 15.19 6.52 2.90
1.90
Asia Woven Sacks Pvt.
Ltd.
7.44 1.00 2008 22.98 4.53 3.14
1.08
Akshat Polymers 4.25 -- 2010 19.77 5.92 2.50
1.52
Raw material – The major raw material for this plant is HDPP in the form
of granules. This raw material is available locally by sales & distribution
network of the major suppliers as under:
Reliance Industries Limited
Nand Agencies
Labdhi International
Hadlia petrochemicals Ltd.
Sharada Polymers
IPCL
BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40
BE sales as % of Net
Sales 98.27 46.38 45.48 43.95 46.29 46.55
Interfirm Comparison: (To be given only where data from comparable units is
available.)
(Amt in Cr)
Name of Company FBL NFBL Year Sales PBT /
Sales
%
TOL /
TNW
CR
Ahmedabad Packaging
Industries Ltd.
3.30 1.20 2007 23.11 2.16 1.47 1.16
Singhal Industries Pvt.
Ltd
6.70 -- 2010 15.19 6.52 2.90
1.90
Asia Woven Sacks Pvt.
Ltd.
7.44 1.00 2008 22.98 4.53 3.14
1.08
Akshat Polymers 4.25 -- 2010 19.77 5.92 2.50
1.52
Raw material – The major raw material for this plant is HDPP in the form
of granules. This raw material is available locally by sales & distribution
network of the major suppliers as under:
Reliance Industries Limited
Nand Agencies
Labdhi International
Hadlia petrochemicals Ltd.
Sharada Polymers
IPCL
66
The raw materials are purchased from the suppliers against the advance
payment only and cash discounts are offered resulting in the increase n
profitability. Any variation in the cost of raw material is proposed to be
passed on to the finished products and will not affect the profitability.
Analysis:-
The firm is into manufacturing of HDPP woven sacks which are
widely used as packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
The promoters have sufficient experience in the line of activity. The
promoters had already made negotiations of the some of the industries
as detailed under for selling the HDPP woven sacks:
Indian Farmers Fertilizer Co. Ltd
Birala cement
Sanghi cement
Ambuja cement
Various grain & Food Export Unit of Gujarat
The orders worth Rs.2.50 crores is expected to be finalized by end of
Agust, 2008 and before commissioning of the plant as advised.
The raw materials are purchased from the suppliers against the advance
payment only and cash discounts are offered resulting in the increase n
profitability. Any variation in the cost of raw material is proposed to be
passed on to the finished products and will not affect the profitability.
Analysis:-
The firm is into manufacturing of HDPP woven sacks which are
widely used as packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
The promoters have sufficient experience in the line of activity. The
promoters had already made negotiations of the some of the industries
as detailed under for selling the HDPP woven sacks:
Indian Farmers Fertilizer Co. Ltd
Birala cement
Sanghi cement
Ambuja cement
Various grain & Food Export Unit of Gujarat
The orders worth Rs.2.50 crores is expected to be finalized by end of
Agust, 2008 and before commissioning of the plant as advised.
67
The company’s borrower rating is SB-6 based on projected financials
as on 31.03.2010 (the first full year of operations).
Projected financials are in line with the financials of the some of the
unit in similar line of activity and production level.
The promoters are having experience of more than 15 years in the line
of the activity.
The affairs of the firm are expected to be managed on professional
lines based on their past experience.
The conduct of accounts of associate with the existing bankers has
been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of
50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
The company has adequate management skills and
production/marketing infrastructure in place to achieve the projected
trajectory. There is steady demand for the product.
The company’s borrower rating is SB-6 based on projected financials
as on 31.03.2010 (the first full year of operations).
Projected financials are in line with the financials of the some of the
unit in similar line of activity and production level.
The promoters are having experience of more than 15 years in the line
of the activity.
The affairs of the firm are expected to be managed on professional
lines based on their past experience.
The conduct of accounts of associate with the existing bankers has
been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of
50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
The company has adequate management skills and
production/marketing infrastructure in place to achieve the projected
trajectory. There is steady demand for the product.
68
LITERATURE
REVIEW
LITERATURE
REVIEW
69
LITERATURE REVIEW
AUTHOR NAME : G.S.Popli and S.K.Puri
BOOK NAME : Strategic Credit Management in Banks
PUBLISHED BY : PHI Learning Pvt. Ltd., Delhi
YEAR : 2013
ABOUT BOOK
Banks are the catalyst of economic development of all the countries whether
developed or developing. In India, banks have been playing a unique role in
mobilizing savings, credit disbursement, investment and providing other
services, therefore they are the heart of our financial system. According to
latest figures released by Reserve Bank of India, commercial banks deposits
touched 59091 billon(5909100 crore), outstanding bank credit amounted to
46119 billon(4611900 crore) and investments touched 17378 billon(1737800
crore) as on March, 2012. The ability of the banking system to perform its
tasks efficiently and in harmony with our needs and economic goals depends
in a large measure on the efficient management of its resources.
Credit has always been one of the principal sources of income for
commercial banks. It represents one of the principal assets of bank. The
extension of credit on a sound basis is, therefore, very essential for the
growth and prosperity of bank.
LITERATURE REVIEW
AUTHOR NAME : G.S.Popli and S.K.Puri
BOOK NAME : Strategic Credit Management in Banks
PUBLISHED BY : PHI Learning Pvt. Ltd., Delhi
YEAR : 2013
ABOUT BOOK
Banks are the catalyst of economic development of all the countries whether
developed or developing. In India, banks have been playing a unique role in
mobilizing savings, credit disbursement, investment and providing other
services, therefore they are the heart of our financial system. According to
latest figures released by Reserve Bank of India, commercial banks deposits
touched 59091 billon(5909100 crore), outstanding bank credit amounted to
46119 billon(4611900 crore) and investments touched 17378 billon(1737800
crore) as on March, 2012. The ability of the banking system to perform its
tasks efficiently and in harmony with our needs and economic goals depends
in a large measure on the efficient management of its resources.
Credit has always been one of the principal sources of income for
commercial banks. It represents one of the principal assets of bank. The
extension of credit on a sound basis is, therefore, very essential for the
growth and prosperity of bank.
70
AUTHOR NAME : B.K. Gupta and Himanshu Gupta
BOOK NAME : Credit Appraisal & Analysis of Financial Statements
PUBLISHED BY : Notion Press, Chennai
YEAR : 2017
ABOUT BOOK
In recent times, there is lot of concern on credit appraisal and analysis of
fianacial statements. This concern has become more relevant when the
position of all banks has become deteriorative due to large amount of NPAs.
On one side RBI is stressing hard on critical analysis of financial statements
on other side, new guidelines issued through completely overhauled
company act 2013(previously known as company act 1956) and company
amendment act 2015 are new and unknown for the bankers.
There had been a lot of changes during last 3-4 years. Company act 2013 has
been notified in official gazette to clarify the ambiguity. New act
“Insolvency and Bankruptcy code 2016” has also become operational in the
country. The book has been written in very simple language without
compromising on its content.
AUTHOR NAME : B.K. Gupta and Himanshu Gupta
BOOK NAME : Credit Appraisal & Analysis of Financial Statements
PUBLISHED BY : Notion Press, Chennai
YEAR : 2017
ABOUT BOOK
In recent times, there is lot of concern on credit appraisal and analysis of
fianacial statements. This concern has become more relevant when the
position of all banks has become deteriorative due to large amount of NPAs.
On one side RBI is stressing hard on critical analysis of financial statements
on other side, new guidelines issued through completely overhauled
company act 2013(previously known as company act 1956) and company
amendment act 2015 are new and unknown for the bankers.
There had been a lot of changes during last 3-4 years. Company act 2013 has
been notified in official gazette to clarify the ambiguity. New act
“Insolvency and Bankruptcy code 2016” has also become operational in the
country. The book has been written in very simple language without
compromising on its content.
71
AUTHOR NAME : Hrishikes Bhattacharya
BOOK NAME : Banking Strategy, Credit Appraisal and Lending
Decisions
PUBLISHED BY : Oxford University Press
YEAR : 2011
EDITION : Second Edition
ABOUT BOOK
The first edition of the book came out in 1997. Since then it has seen 12
reprints, which indicate that it has been well-received by students and the
banking community.
I had refrained myself from writing a second edition for a long time because
so many changes were taking place around the globe changing the very
notion of banking. The system was in a fluid state. Now that the system
has stabilised largely, I thought it was time to come out with a second
edition. I have written three new chapters for the books, which are the
products of my considerable research during the past two years.
AUTHOR NAME : Hrishikes Bhattacharya
BOOK NAME : Banking Strategy, Credit Appraisal and Lending
Decisions
PUBLISHED BY : Oxford University Press
YEAR : 2011
EDITION : Second Edition
ABOUT BOOK
The first edition of the book came out in 1997. Since then it has seen 12
reprints, which indicate that it has been well-received by students and the
banking community.
I had refrained myself from writing a second edition for a long time because
so many changes were taking place around the globe changing the very
notion of banking. The system was in a fluid state. Now that the system
has stabilised largely, I thought it was time to come out with a second
edition. I have written three new chapters for the books, which are the
products of my considerable research during the past two years.
72
AUTHOR NAME : K.Vaidyanathan
BOOK NAME : Credit Risk Management for Indian Banks
PUBLISHED BY : Sage Publications, New Delhi
YEAR : 2013
ABOUT BOOK
Since the liberalization of the Indian economy,competition in the Indian
banking sector has multiplied manifold. As a result, Indian corporates are
now spoilt for choice, which enables them to play one bank against another
in their effort to get a favourable deal. Though a bank may wish to attract the
highly rated accounts to reduce its credit risk exposure, the returns from such
accounts are typically low because the intenser competition for such
accounts result in razor-thin margins. In fact, even after accounting for lower
need for provisioning against loan losses and the smaller amounts of capital
that need to be allocated for the highly rated accounts, the margins for banks
on these credit product have squeezed. In fact, if headline defaults such as
those of kingfisher or Deccan Chronicle happen (or a couple of more large
names default), the risk-return tradeoff from lending to the reputed entities
would become less worthwhile for banks.
AUTHOR NAME : K.Vaidyanathan
BOOK NAME : Credit Risk Management for Indian Banks
PUBLISHED BY : Sage Publications, New Delhi
YEAR : 2013
ABOUT BOOK
Since the liberalization of the Indian economy,competition in the Indian
banking sector has multiplied manifold. As a result, Indian corporates are
now spoilt for choice, which enables them to play one bank against another
in their effort to get a favourable deal. Though a bank may wish to attract the
highly rated accounts to reduce its credit risk exposure, the returns from such
accounts are typically low because the intenser competition for such
accounts result in razor-thin margins. In fact, even after accounting for lower
need for provisioning against loan losses and the smaller amounts of capital
that need to be allocated for the highly rated accounts, the margins for banks
on these credit product have squeezed. In fact, if headline defaults such as
those of kingfisher or Deccan Chronicle happen (or a couple of more large
names default), the risk-return tradeoff from lending to the reputed entities
would become less worthwhile for banks.
73
AUTHOR NAME : D.Muraleedharan
BOOK NAME : Modern Banking
PUBLISHED BY : PHI Learning Pvt. Ltd., Delhi
YEAR : 2014
EDITION : Second Edition
ABOUT BOOK
In an era of universal banking, financial transactions are taking place
through a single window at national and transnational levels. Today’s
digitalized world of E-commerce ant net-based technologies has transformed
and converged conventional banking into a virtual mode. In this scenario, we
are going to witness new business models, diversified financial products and
services and new services delivery channels. The outbreak of technology is
going to establish virtual business models of ‘anytime and anywhere
banking’, challenging the very existence of the brick and mortar style of
traditional banking. In the course of the prepartion of this revised edition, I
have been assisted by many of my teachers, students, friends and well-
wishers.
AUTHOR NAME : D.Muraleedharan
BOOK NAME : Modern Banking
PUBLISHED BY : PHI Learning Pvt. Ltd., Delhi
YEAR : 2014
EDITION : Second Edition
ABOUT BOOK
In an era of universal banking, financial transactions are taking place
through a single window at national and transnational levels. Today’s
digitalized world of E-commerce ant net-based technologies has transformed
and converged conventional banking into a virtual mode. In this scenario, we
are going to witness new business models, diversified financial products and
services and new services delivery channels. The outbreak of technology is
going to establish virtual business models of ‘anytime and anywhere
banking’, challenging the very existence of the brick and mortar style of
traditional banking. In the course of the prepartion of this revised edition, I
have been assisted by many of my teachers, students, friends and well-
wishers.
74
AUTHOR NAME : R.M.Srivastava and Divya Nigam
BOOK NAME : Management of Indian Financial Institutions
PUBLISHED BY : Himalaya publishing House
EDITION : Eight Revised Edition
ABOUT BOOK
Since the publication of the seventh edition of the book, Indian economic
and financial systems witnessed tectonic changes leading to intensified
competition and financial restructuring, deepening economic
interdependencies and integration of global financial markets, emergence of
variegated financial insitutions instruments and financial mechanics,
financial markets and growing need for financial inclusion for sustained and
all round development. While these development backed by path breaking
advancement in information tecnology have offered incredible opportunities
to financial institution to grow and globalize, the latter is facing perilous
challenges in terms of increased financial risks and uncertatinty necessitating
financial engineering in their thinking and action.
AUTHOR NAME : R.M.Srivastava and Divya Nigam
BOOK NAME : Management of Indian Financial Institutions
PUBLISHED BY : Himalaya publishing House
EDITION : Eight Revised Edition
ABOUT BOOK
Since the publication of the seventh edition of the book, Indian economic
and financial systems witnessed tectonic changes leading to intensified
competition and financial restructuring, deepening economic
interdependencies and integration of global financial markets, emergence of
variegated financial insitutions instruments and financial mechanics,
financial markets and growing need for financial inclusion for sustained and
all round development. While these development backed by path breaking
advancement in information tecnology have offered incredible opportunities
to financial institution to grow and globalize, the latter is facing perilous
challenges in terms of increased financial risks and uncertatinty necessitating
financial engineering in their thinking and action.
75
CONCLUSION
CONCLUSION
76
Conclusion
The credit appraisal is done by involving the Evaluation of management,
Technical feasibility,Financial viability, Risk analysis and Credit rating. It
is on the basis of the credit risk level, collateral securities to be given by
the borrower are determined. The credit department thoroughly analyses
the credit requirement of the company and the capacity to service the debt.
The banks have conservative norms to appraise the project the bank at the
max. Banks allow a 20% hike in projections. The credit appraisal passes
through various stages and evaluations before it is appraised.
The financial and banking system has placed before the MSME sector a
fully dressed up and it is the appreciation of the efforts and also as an
incentive to work hard. The sector should avail of the opportunities and
scale new heights. With this thesector will be benefited and the society
too. This shows MSME has sound system for credit appraisal. The credit
appraisal process carried out at MSME has good parameters to appraise.
Conclusion
The credit appraisal is done by involving the Evaluation of management,
Technical feasibility,Financial viability, Risk analysis and Credit rating. It
is on the basis of the credit risk level, collateral securities to be given by
the borrower are determined. The credit department thoroughly analyses
the credit requirement of the company and the capacity to service the debt.
The banks have conservative norms to appraise the project the bank at the
max. Banks allow a 20% hike in projections. The credit appraisal passes
through various stages and evaluations before it is appraised.
The financial and banking system has placed before the MSME sector a
fully dressed up and it is the appreciation of the efforts and also as an
incentive to work hard. The sector should avail of the opportunities and
scale new heights. With this thesector will be benefited and the society
too. This shows MSME has sound system for credit appraisal. The credit
appraisal process carried out at MSME has good parameters to appraise.
77
BIBLOGRAPHY
BIBLOGRAPHY
78
BIBLIOGRAPHY
1. G.S. Popli and S.K. Puri, “Strategic Credit Management in Banks”,
PHI Learning Pvt. Ltd., Delhi, 2013.
2. B.K. Gupta and Himanshu Gupta, “Credit Appraisal and analysis of
Financial Statements”,Notion Press, Chennai, 2017.
3. Hrishikes Bhattacharya, “Banking Strategy Credit Appraisal and
Lending Decisions”, Oxford University Press, 2011, 2
nd
.
4. K. Vaidyanathan, “Credit Risk Management for Indian Banks”, Sage
Publication, New Delhi, 2013.
5. D. Muraleedharan, “Modern Banking”, PHI Learning Pvt. Ltd., Delhi,
2014, 2
nd
.
6. R.M. Srivastava and Divya Nigam, “Management of Indian Financial
Institutions, Himalaya Publishing House, 8
th
Revised.
7. Casey Boon, “Credit Spreads”, American Publishers, 2017.
8. Jiri Witzany, “Credit Risk Management”, Springer International
Publishing, 2017.
9. Panayiota Koulafetis, “ Modern Credit Risk Management”, Springer
Nature, UK, 2017.
10. Mario Anoli, Elena Beccalli and Tommaso Giordani, “Retail Credit
Risk Management”, Palgrave Macmillan, UK., 2013.
11. Morton Glantz, Johnathan Mun, “The Bankers Handbook on Credit
Risk”, Elsevier Academic Press, USA, 2008.
12. Prasanna Chandra, “Fundamentals of Financial Management”,
McGraw Hill Education(India) Pvt. Ltd., 2014, 6
th
.
BIBLIOGRAPHY
1. G.S. Popli and S.K. Puri, “Strategic Credit Management in Banks”,
PHI Learning Pvt. Ltd., Delhi, 2013.
2. B.K. Gupta and Himanshu Gupta, “Credit Appraisal and analysis of
Financial Statements”,Notion Press, Chennai, 2017.
3. Hrishikes Bhattacharya, “Banking Strategy Credit Appraisal and
Lending Decisions”, Oxford University Press, 2011, 2
nd
.
4. K. Vaidyanathan, “Credit Risk Management for Indian Banks”, Sage
Publication, New Delhi, 2013.
5. D. Muraleedharan, “Modern Banking”, PHI Learning Pvt. Ltd., Delhi,
2014, 2
nd
.
6. R.M. Srivastava and Divya Nigam, “Management of Indian Financial
Institutions, Himalaya Publishing House, 8
th
Revised.
7. Casey Boon, “Credit Spreads”, American Publishers, 2017.
8. Jiri Witzany, “Credit Risk Management”, Springer International
Publishing, 2017.
9. Panayiota Koulafetis, “ Modern Credit Risk Management”, Springer
Nature, UK, 2017.
10. Mario Anoli, Elena Beccalli and Tommaso Giordani, “Retail Credit
Risk Management”, Palgrave Macmillan, UK., 2013.
11. Morton Glantz, Johnathan Mun, “The Bankers Handbook on Credit
Risk”, Elsevier Academic Press, USA, 2008.
12. Prasanna Chandra, “Fundamentals of Financial Management”,
McGraw Hill Education(India) Pvt. Ltd., 2014, 6
th
.
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